I don’t know where the stock market is going, but I will say this: that if it continues higher, this will do more to stimulate the economy than anything we’ve been talking about today or anything anybody else was talking about. – Alan Greenspan
The Dow Jones Industrial Average was a victim of profit-taking last week in its ascent to the 30,000 level and closed back below 29,000. The S&P 500 Index and the Nasdaq Composite Index also suffered their first weekly loss in 2020 as investors were unnerved by several confirmed cases of the coronavirus, a respiratory virus that is contagious and has proven to be deadly. It was the biggest weekly loss for the S&P 500 and the Dow since last August and concerns rose over the potential impact of the virus on the global economy. The virus originated in central China and at least three cases have appeared in the U.S. as the World Health Organization (WHO) met to decide whether to declare a global health emergency. The outbreak could not have come at a worse time for China as it coincided with the Lunar New Year when many Chinese travel. The stock market had been due for a pullback and the news of the coronavirus gave investors an excuse to sell and lock in some profits from the recent run-up in stocks. It was the second week of the fourth quarter earnings season and the results, though generally much better than expected, took a back seat to the possible consequences of the spread of the deadly virus. Blue chip companies such as IBM, Intel, Procter & Gamble and American Express all beat analysts’ earnings estimates and although only about 16% of S&P 500 companies have reported their quarterly profits so far, roughly 70% of them have exceeded estimates. Worries about what effect the virus might have on global growth sent bond yields plunging, too, as the yield on the 10-year Treasury ended the week at 1.68%, its lowest level since October. The yield curve also flattened out as the 2-year Treasury yield was at 1.49%, only 19 basis points less than the yield on the 10-year Treasury. (A basis point is one hundredth of one percent). The coronavirus will unlikely be responsible for sending the U.S. economy into a recession but it certainly will be the most important story for investors in the coming weeks and definitely bears watching.
Leading economic indicators for December fell slightly and have declined in four of the last five months, driven by rising unemployment claims and a drop in housing permits. Despite the decline, the outlook for the economy is still positive and should support growth of about 2% in 2020.
The European Central Bank (ECB) met last week and decided to leave its monetary policy unchanged with interest rates that remain in negative territory.
For the week, the Dow Jones Industrial Average slid 1.2% to close at 28,989 while the S&P 500 Index dropped 1.0% to close at 3,295. The Nasdaq Composite Index tumbled 0.8% to close at 9,314.
The preliminary reading for fourth quarter gross domestic product (GDP) is expected to be 2.2%, slightly better than the 2.1% growth rate in the third quarter. The personal consumption expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, is expected to be 1.5% year over year in December, still below the Fed’s target of 2%. New home sales in December are forecast to be higher than in November and the Consumer Confidence Index for January is also forecast to be higher than in the previous month.
The Federal Open Market Committee (FOMC) announces its monetary policy decision this week and is expected to keep the federal funds rate unchanged at 1.50% to 1.75%.
The most notable companies scheduled to report fourth quarter earnings this week include Apple, Facebook, Microsoft, Amazon, ADP, 3M, Whirlpool, GE, Honeywell, DuPont, United Technologies, Caterpillar, AT&T, Verizon, Exxon Mobil, Chevron, Visa, Raytheon, Starbucks and Coca Cola.
The signing of the trade deal between the U.S. and China less than two weeks ago was expected to increase the prospects for global growth and, as a result, bond yields were widely expected to increase gradually. But the outbreak of the coronavirus last week and the potential severity that this new virus may bring has caused investors to rethink their outlook. The fear and uncertainty that the virus has created has led to a decline in the 10-year Treasury yield from 1.83% a week ago to just 1.68% on Friday. That is the biggest one week move in the 10-year Treasury yield since November and the yield could move lower until the impact of the virus becomes more clear. In addition to the negative effects the virus may have on global growth, central banks in Europe and Japan continue to have negative interest rates while the Federal Reserve has maintained that it is on hold with its easy monetary policy and unlikely to make any changes this year. The attractiveness of U.S. bond yields relative to yields overseas has been a factor in driving yields here lower, which has also benefited the stock market. Investors may have come to the realization that there are still headwinds confronting the U.S. economy even with Phase One of the trade agreement with China in place and after three interest rate cuts by the Federal Reserve last year. The coronavirus is just the latest obstacle that the economy must overcome.