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Equity markets are resilient despite coronavirus spread

FEB. 10, 2020

Take-aways

  • Equity markets are showing remarkable resilience, driving to record highs as investors focus more on the macro recovery than the coronavirus outbreak
  • Earnings continue to surprise to the upside, with the fourth quarter tracking at 1% growth on 4% sales growth. This momentum is expected, with near double-digit growth forecast for 2020
  • Upside to payroll estimates continues to show that the economy is stronger than many economists models view as possible
  • While equity market trades near record highs, bond yields continue to tell different story

Summary

  • Equity markets saw a sharp rebound to record territory last week, as investor focus shifted from coronavirus fears to an improving macro landscape. The earnings inflection continues to develop, with the fourth quarter now trending to grow versus a year ago versus a decline of 2% expected at the beginning of the year. Looking ahead, analysts see earnings growth of 2.5% to 5% for Q1 2020 and Q2 2020.
  • January payrolls grew for a record 112th straight month in January with 225k additions, handily beating estimates of 165k and the December reading of 147k. The highlight of the report was an increase of individuals back to the workforce, which allows above-average growth despite a rising unemployment rate. Wage growth ticked higher but remains at a controlled 3.1% from a year ago. Productivity grew in 2019 at the best rate since 2010, driving expectations for first-quarter growth to 2.7% per the Atlanta Fed’s GDPNow model.
  • While the coronavirus outbreak faded as a driver of investor behavior, the spread has not been contained. Sunday saw a record 97 deaths, bringing the total to 910. Total reported cases have topped 40,000, with scientific modeling predicting a peak in mid-to-late February at roughly 500k cases. The economic impact will be seen in global supply chains and tourism, with the White House predicting it could hit the domestic economy by 0.2%. Some of the purchases promised under the recent “phase one” trade agreement will be pushed out, though China did halve tariffs on $75 billion of U.S. goods next Friday.

Other Topics

  • Investors have largely ignored political trends, including last week that included the Iowa Caucus, State of the Union and the impeachment vote. Bernie Sanders and Michael Bloomberg continue to distance themselves from the pack according to betting markets (45% and 21%, respectively), while Joe Biden and Elizabeth Warren (12% and 6%) fade. Pete Buttigieg (15%) is in third following the impressive performance in Iowa. The New Hampshire primary is Tuesday.

What to Watch

  • Earnings season begins to wind down next week, as economic data take the spotlight. Data include NFIB Small Business Index and JOLTs job openings on Tuesday, CPI inflation on Thursday, and retail sales, industrial production and consumer sentiment on Friday.

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Disclaimers

  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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