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S&P 500 hits record high before falling on strong jobs report

The safe way to double your money is to fold it over once and put it in your pocket. – Kin Hubbard, American humorist

Despite news that there were over 31,000 confirmed cases of the coronavirus and over 600 deaths in China, the major stock averages hit record highs on Thursday, only to relinquish those all-time highs on Friday after a strong jobs report. Both the Dow Jones Industrial Average and the S&P 500 Index were up 3% for the week while the Nasdaq Composite Index jumped 4%. Economists at JP Morgan forecasted that China’s real gross domestic product (GDP) would only increase 1% in the first quarter due to the coronavirus while other economists predicted growth would be zero. What might have boosted investors’ confidence were reports that China’s central bank cut its key lending rate as well as the bank’s reserve requirement to support economic growth. It is likely that China will be very aggressive with fiscal and monetary stimulus to reignite growth in the economy to offset the negative effects of the virus. China also announced that it plans to halve tariffs on a slew of U.S. products totaling about $75 billion, a positive for U.S. companies. Fourth quarter corporate earnings reports continued to surprise to the upside, which helped negate investors’ fears about the spread of the coronavirus. More than 60% of S&P 500 companies have reported earnings and about 71% of them have topped expectations. Economic reports released last week were also mostly favorable. Ironically, the most important piece of economic data, the January employment report announced on Friday, was much better than expected but resulted in the only daily loss for the week for stocks. Nonfarm payrolls increased 225,000, compared to estimates of 158,000 new jobs, and the unemployment rate ticked higher to 3.6% as the labor participation rate also increased. Wage growth was slightly better than expected but not too strong as to ignite inflation fears. The stronger than expected jobs report may have caused investors to conclude that the Federal Reserve would no longer consider cutting interest rates further, effectively ending its easy monetary policies.

Last Week

In addition to the January employment report, other reports on the labor market were also favorable. ADP reported that private sector jobs in January rose by 291,000, the biggest monthly gain in five years, and weekly jobless claims fell to a 9-month low of 202,000. The ISM manufacturing index rose to a 6-month high and was better than expected while the ISM non-manufacturing or services sector index was solidly in expansion territory as the outlook for the economy is favorable and consumer confidence remains high. Factory orders in December were also strong and better than forecast.

For the week, the Dow Jones Industrial Average rose 3% to close at 29,102 while the S&P 500 Index gained 3.2% to close at 3,327. The Nasdaq Composite Index surged 4% to close at 9,520.

This Week

The January consumer price index (CPI) is expected to increase modestly and show a year-over-year rise of 2.5% while the core CPI that excludes food and energy is seen rising only 2.2%. Retail sales in January are forecast to show a healthy increase as consumer spending remains strong and the preliminary University of Michigan consumer sentiment for February is expected to remain at a high level.

Federal Reserve Chairman Jerome Powell gives his semiannual Monetary Policy Report to Congress before the House Financial Services Committee on Tuesday and no major surprises are expected.

The most notable companies scheduled to report fourth quarter earnings this week include Cisco Systems, Nvidia, Applied Materials, CVS Health, PepsiCo, Kraft Heinz, Newell Brands, AIG, Waste Management and Duke Energy.

Portfolio Strategy

Fortunately, despite the alarming number of confirmed cases of the coronavirus, the rate of the spread of the virus has slowed as China has moved aggressively to contain the deadly disease. There were even unconfirmed reports last week that an effective drug was found to treat people with the coronavirus. Already this virus has claimed more lives than the severe acute respiratory syndrome, or SARS, epidemic in China back in 2003. Not only has it been more deadly, but it is also more contagious. The World Health Organization (WHO) has declared the virus a global health emergency and most of the confirmed cases have been in China with only 12 cases in the U.S. China has effectively shut down the city and province where the virus originated and has quarantined millions of people, imposed travel restrictions and closed schools. While it is too early to know what effect the virus will have on China’s economy as well as the global economy, China is now the world’s second largest economy and has a much bigger impact on the global economy than in 2003. Although China is likely to experience a dramatic slowdown in its growth, it should be short-lived once the virus is contained. The quicker that this happens, the less effect it will have on the global economy. Unfortunately, all of the economic data that has been released has been before the coronavirus so investors are left guessing. This uncertainty about the potential outcome and its effects on the economy create fear among investors and could cause a pullback in the stock market. But from past experience, the most prudent course of action for investors is to trust your investment objective and not make any drastic changes to your asset allocation.