My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

What Matters This Week (March 2), and A Few Things from Last Week Too

Updated: Jul 19, 2020

The Market Last Week:  Just thinking about the global equity markets last week nearly brings tears to my eyes as I write this. That was an UGLY week! And to make it personal for a moment, I got caught just when I had repositioned my own portfolio thinking that investors had rather shockingly decided to ignore the economic consequences of Coronavirus along with other warning indicators that have been visible for some time. If you can bear it, let’s take a broader look at just what has happened in the major equity market indices this year and, most painfully, last week.

The column “Week of Feb 24-28” says it all - if you were invested in equities, or more specifically perhaps in EFT indices or large cap names anywhere around the world, you got buried last week.  The first two months of this year have been poor, with last week being a massive exclamation point that finally laid bare the economic risks associated not only with Coronavirus, but also with slowing global economic growth and stock valuations that were on the expensive side.  We still don’t know where this is going and can only hope that the fear factor driving massive selling has subsided somewhat over the weekend.  But who knows?  No one wants to move on the tracks in front of a fast moving train coming right at you! Personally, I think there is value in select names, and the cheaper these stocks get the more attractive they become.  Perhaps it’s some solace to step back and see when equity indices were last at these levels, and what this means as far as taking the shine off of stellar 2019 equity market returns.

Let’s be realistic a moment – it’s not that bad when you look at this table, aside from the rather poor (and BREXIT-affected) results in the U.K. stock market. The S&P 500 was at Friday’s closing level in early October. The return on the S&P 500 since the end of 2018 has still been 17.8% over the 14-month period. One could argue that the U.S. stock market was due a correction anyhow given that 2019 returns for the S&P 500 were so above trend (around 30% for the year), although this has been a very harsh, fast, unexpected and unwelcome reversion.


At the epicentre of the Coronavirus outbreak, the short-lived rally in the Chinese equity market the week before, driven by the Chinese government promising to unleash fiscal and monetary stimulus (to combat effects of Coronavirus), gave way last week to a reality check as the Shanghai composite index tumbled 6.6%. There is truly no place to hide as far as global stocks.


As an investor, if you wish to cut and run because you can’t stomach a choppy equity market, it is completely understandable. However, do not forget that - for those of you with a long-term horizon - the equity market still offers the best returns over long periods of time compared to nearly every other asset class. If you’re looking for somewhere to hide, cash looks to be the best alternative. Treasuries have had a good run, but central bank easing might halt that, and even safe haven assets like gold and Yen stumbled slightly last week.


I am not sure what to expect this coming week, but I hope we are near the bottom.  Perhaps the weekend served as a “circuit breaker” to allow investors to regroup, softening the one-way mentality that has exaggerated the selling pressure and permitting cooler heads to prevail. Also, central banks - or those that can - will likely act, and governments will probably eventually step in with some fiscal stimulus too.  Hold on tightly though as I suspect we are in for a rocky road in the near-term as the Coronavirus continues to spread around the world.


Earnings Last Week, and What’s Ahead: As we near the end of earnings season with 477 of the S&P 500 companies now reporting, we have seen earnings growth of 3.1% during this round (6% excluding the energy sector).  The research firm Refinitiv provides an excellent summary of where we stand as far as S&P 500 earnings each week in “This Week in Earnings”. 70% of companies have exceeded consensus expectations.   Here’s a few results from last week.

The numbers were generally decent, although they continued to be mixed in retail (Macy’s, L-Brands and Best Buy). Home stores Home Depot and Lowe’s fared slightly better with solid numbers, but home builder Toll Brothers missed their numbers and paid a price. Amongst travel-related names, Marriott’s stock reacted relatively well (in the context of the market) after its earnings were released, but Hertz did very poorly, with the shares down 28% on the week.


This was indeed a solid earnings season for S&P 500 companies, but what matters much more now is the path forward.  I suppose we can say three things in this respect.  Firstly, more and more companies are revising their next quarter outlook downward, taking account of the negative effect on the economy of Coronavirus. Secondly, with equity prices tumbling, the forward P/E ratio has fallen to 17 (Refinitiv), so valuations are suddenly looking better than just two weeks ago.  And lastly, it is more important than ever to look at specific company or sector attributes, because the effects of Coronavirus on a company’s earnings will undoubtedly vary depending on the sector and company’s business profile. I covered this in slightly more detail in my blog post last week – see The Connection Between Equity Market Performance and Coronavirus. Thinking big picture for a moment, the “stay-at-home” companies are likely to benefit the most from the Coronavirus for obvious reasons.  For example, think about streaming companies, video / video conferencing companies, companies making video devices (think iPads), companies involved in healthcare / protection from viruses, and so on.  At the other end of the spectrum, airlines, travel companies, hotels / resorts, and so on, are likely to be hurt the worst as people avoid situations that might expose them to the virus.


Economic Data: Data releases last week were largely overshadowed by the market meltdown. U.S. data was mixed, although the flash PMI figures from the Friday before (Feb 21st) signalled that U.S. private sector output was slowing as the Coronavirus threw caution into the wind for businesses. We shall find out in the first half of the week at PMI figures come out today (manufacturing) and Wednesday (non-manufacturing). New home sales and personal income growth in the U.S. in January both beat consensus figures. Consumer spending was slightly below expectations, and core inflation came in at 0.1% for January, below the target 2.0%/annum on an annualised basis. Perhaps most importantly this week in terms of U.S. data, the release of closely-watched non-farm payrolls and unemployment for February is set for release on Friday (March 6th). With concerns over Coronavirus threatening global economic growth and the equity markets losing 10%+ of their value last week, the data going forward will be more difficult to project although we have almost certainly reached inflection points in some of the economic data. If the U.S. consumer - which has been the engine of the U.S. economy – reigns in spending as anticipated, the U.S. economy will undoubtedly suffer. In Europe, we get core inflation figures (February) and unemployment figures (January) this week. Overall, all signs seem to be pointing towards a further deceleration in global economic growth, which has been occurring anyway now for several quarters. I would look for the Fed and possibly even the BoE to act soon, but the fact is that the ECB and BoJ are largely out of bullets as far as unleashing further stimulus in the Eurozone and Japan, respectively. Italy announced a €3.5 bln fiscal stimulus package last night to combat the effects of Coronavirus, and it will not be the last government to use fiscal stimulus to try to restore confidence and life into the economy. Look for powerful measures to be discussed or implemented this week, perhaps coordinated across governments to send a strong message to investors.


US Politics:  There was another Democrat debate last week followed by a primary on Saturday in South Carolina. Joe Biden won convincingly in a state that is more diverse than Nevada, Iowa and New Hampshire, and arguably more representative of the Democratic party at large. This will give his campaign new life as we head now into the all-important Super Tuesday. I listened to a podcast last week which suggested that the Democrats need to rally around a moderate candidate by asking some of the other moderates (e.g. Buttigieg and Klobuchar for example) to stand down, so as to allow some consolidation around a viable centrist candidate to challenge front-runner Bernie Sanders.   And indeed, following the SC results, Tom Steyer and Pete Buttigieg both withdrew from the race over the weekend.  Michael Bloomberg (not on SC ballot) and Elizabeth Warren look increasingly fragile, too, so Super Tuesday will be a big day for the Dems. The fact that #POTUS is laying some of the blame of the stock market sell off on the rise of Dem front-runner Bernie Sanders should be good news then, because Joe Biden’s win on Saturday could logically work some magic in the other direction. Personally, I don’t buy this because the equity market weakness is global, and it is clearly caused by the economic damage from Coronavirus (although there is little doubt that Sanders in The White House would not be good for the U.S. economy). In any event, President Trump’s “trump card” (can I say that?) is the economy. Should the U.S. economy falter and drag the stock market down further with it, I would expect his re-election bid to be hurt, too, because he has staked so much on the booming U.S. stock market.


Other Things to Watch: There is much to pay attention to in the coming weeks in addition to markets and “Super Tuesday”. The U.K. is digging in as it tries to strike post-BREXIT trade agreements with the likes of the E.U. and the U.S. The U.S. and the Taliban have apparently reached a deal to end hostilities in Afghanistan. And if Coronavirus isn’t bad enough, the economies of countries that are exporters of oil - which has had its price fall even more that the global stock markets this year (oil down 16% YtD) - are in for a double economic whammy.


Recent Posts: Last week, I wrote two posts related to markets and the Coronavirus: The Connection between Equity Market Performance and Coronavirus, and Three Coronavirus Effects on the Economy, One Direct and Two “Indirect”. If any of these topics interest you, you can click on each and go to the posts.

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