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Equity investors adopt “glass half full” mindset

FEB. 19, 2020


  • Market momentum continues despite uncertainty in the global economy from the ripple effects of the coronavirus
  • Earnings season has surprised to the upside, but expectations for 2020 suggest a strong ramp to double digit fourth-quarter growth. With valuations at 18-year highs, the market is increasingly depending on meeting or beating expectations
  • The optimism in the equity market is not shared in the Treasury and commodity markets, with starkly different YTD movement


  • Markets are showing remarkable resiliency given the uncertainties surrounding the coronavirus outbreak. The global economy has been showing signs of stabilization, but the unclear duration and magnitude of the disruption is a risk
  • Equity markets have chosen instead to focus on the supportive fundamentals. Earnings have reached an inflection, showing slight growth in the fourth quarter versus the expectation of a decline. Estimates for 2020 have been revised lower, but at a less aggressive pace than is normal. The quarterly progression of growth in 2020 is forecast at 2%, 4%, 9% and 12%.
  • Economic data is mostly beating to the upside. Examples last week included NFIB Small Business Index and consumer sentiment, though industrial production was weak and retail sales mixed. The Citi Economic Surprise Index is at the best level in nearly two years, signaling data is consistently beating expectations.
  • Chinese officials are continuing to express calm in the face of the coronavirus outbreak, with nearly 71,000 cases and 1,770 deaths. The PBOC lowered interest rates again, while the government is looking at tax cuts and increased loans to manufacturers. Local equity markets gained 2% on Monday in reaction. Officials are confident that the epidemic will be over soon, and the economic hit will be temporary. Economists have been reducing China’s growth outlook for the quarter to roughly zero, with a strong rebound in the second quarter. The U.S. is not expected to see a severe direct hit, thought the secondary impact on global growth is unknown.

Other Topics

  • The remarkable dichotomy between the views of equity investors and bond/commodity investors continues. Last week, equity markets gained nearly 2%, while Treasury yields were roughly flat. Year-to-date, the S&P 500 has returned nearly 5%, while the 10-year Treasury yield is down 0.33% and crude prices are down 15%. Equity investors are focused on the supportive domestic fundamentals, while bond and commodity markets have been driven by fears of a global slowdown.
  • The Democratic primary race currently looks to be between Bernie Sanders (44% per PredictIt) and Michael Bloomberg (25%). It is, however, a continually changing field, as three months ago, the leaders were Biden and Warren (24% each).

What to Watch

  • Several important economic data points will be released this week despite markets being closed on Monday, including producer prices and housing starts on Wednesday, leading indicators Thursday, and PMI and existing home sales on Friday. The minutes from the recent FOMC meeting will be released on Wednesday.

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  • 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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