Feb. 10, 2020 Market Update for the Month Ending January 31, 2020
Coronavirus outbreak leads to mixed results for markets
January was a mixed month for markets. Both the S&P 500 and the Dow Jones Industrial Average declined, falling 0.04 percent and 0.89 percent, respectively. The Nasdaq Composite also saw some late-month volatility, but previous gains were strong enough to leave the index up 2.03 percent.
Per Bloomberg Intelligence, the blended year-over-year fourth-quarter earnings growth estimate for the S&P 500 is –0.3 percent. If this holds, it would mark four straight quarters with year-over-year earnings declines. The situation has been improving, however, and analysts are currently forecasting a return to growth in the first quarter of 2020. From a technical perspective, all three major U.S. indices remained above their respective 200-day moving averages.
International markets had a tough start this year. The MSCI EAFE Index fell by 2.09 percent in January. The MSCI Emerging Markets Index faced pressure as well, falling 4.66 percent. Concerns about the coronavirus and its effect on China’s growth were the primary causes. Despite the declines, both indices remained above their 200-day moving averages.
Fixed income, meanwhile, had a very strong start to the year, as the general risk-off sentiment drove investors into safe-haven assets. Long-term U.S. Treasury yields fell sharply in January. The 10-year yield declined from 1.88 percent at the start of the month to 1.51 percent at month-end. This led the Bloomberg Barclays U.S. Aggregate Bond Index to a 1.92 percent gain.
High-yield spreads increased notably, as investors demanded greater yield to compensate for additional credit risk. The Bloomberg Barclays U.S. Corporate High Yield Index inched up by 0.03 percent as a result.
Shifting geopolitical risks affect markets
Throughout the month, several geopolitical risks grabbed headlines and rocked markets. The most significant was the discovery and spread of the coronavirus, which was declared a public health emergency by the World Health Organization at the end of January. Governments around the world have taken swift action to work toward halting the spread of the disease. Still, it has been the major driver of global market volatility.
Another major news story during the month was the escalation of military tensions between the U.S. and Iran. Notably, a U.S. strike killed an Iranian general in Iraq. It was followed by the retaliatory strike from Iran on two Iraqi airbases that were housing American military personnel. This story captured attention for more than a week, but the effect on financial markets was short-lived.
Economic data improves
Despite the news-driven market turmoil, January’s economic data releases showed improving fundamentals in the U.S. Both major surveys of consumer confidence climbed, driven by a strong jobs market and increased optimism about future equity market returns.
Consumer spending data was healthy for the month, with retail sales growing 0.3 percent. This brought year-over-year growth up to 5.8 percent, the highest it’s been since August 2018.
Housing continues to be a bright spot in the economic expansion. Low mortgage rates and high consumer confidence have driven prospective buyers into the market. Existing home sales increased, bringing the pace of sales to its highest level since February 2018. As you can see in Figure 1, housing starts grew dramatically at year-end. Residential investment grew at the fastest rate in two years in the fourth quarter, contributing to fourth-quarter gross domestic product growth.
Figure 1. Housing Starts 2007–Present
Economy continues to grow, but risks remain
We saw solid economic updates during the month, with the strong consumer surveys pointing to future spending growth. As long as consumers remain willing and able to spend, the economic expansion will likely continue. But, of course, risks are still present, even when the economic environment remains positive. A well-diversified portfolio that matches investor goals and time horizons remains the best path forward.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
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Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network®.
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