Market update: When favorable fundamentals collide with uncertainty
Between October 2 and January 17, the S&P 500 Index posted an impressive advance of over 15% (St. Louis Federal Reserve S&P 500 data). During the month of January, the index of 500-large U.S.-based companies closed at a record high six times, the last being January 17.
What’s been driving stocks higher? The economy is expanding modestly, recession fears have subsided, interest rates remain very low, and the Fed has been expanding its balance sheet via a QE (quantitative easing)-like program of T-bill purchases: $60 billion per month at least into Q2.
With few headwinds to speak of, stocks surged, that is, up until a most unexpected surprise came in the form of an epidemic that has infected over 17,000 people through February 3, nearly all in China.
You see, when stocks are priced for perfection, it leaves them vulnerable to disappointments or surprises.
Before I delve into the recent volatility, let me quote from Charles Schwab:
While it is impossible to predict the extent a virus can spread and have greater consequences than past epidemics, history indicates that the global economy and markets have been relatively immune to the effects of past epidemics. A key reason is that global health organizations are prepared for outbreaks and effective when mobilized. Combining these efforts with widespread public awareness and adoption of effective safety measures eventually limits the spread of the virus and its economic impact.
Given the more elevated levels in the stock market, the initial reaction among short-term traders has been to shoot first and aim later. We’ve seen it before; we’ll see it again.
The fear: the epidemic will slow economic growth in the world’s second-largest economy, and the impact will ripple across the globe.
It seems unlikely that we’ll see a direct health or economic impact in the U.S. So far, the CDC has said 11 people have tested positive in the U.S (through February 3). That compares to at least 19 million who have come down with the seasonal flu, resulting in at least 10,000 deaths through January 25.
Yet, that hasn’t stopped us from attending movies, hopping on airplanes, or going to restaurants.
We’ve seen global epidemics before. The World Health Organization declared an emergency during the 2016 Zika virus, the 2009 H1N1 swine flu, the 2014 Ebola outbreaks, and the outbreak of SARS in China in 2003.
I suspect the number of cases in China will continue to rise, and we may see additional volatility until investor confidence rises that China has the epidemic under control.
Medium- and longer-term, the economic fundamentals have historically had the biggest influence on equity prices. If you have any questions or concerns, I’d be happy to have a conversation with you. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
What’s been driving stocks higher? The economy is expanding modestly, recession fears have subsided, interest rates remain very low, and the Fed has been expanding its balance sheet via a QE (quantitative easing)-like program of T-bill purchases: $60 billion per month at least into Q2.
With few headwinds to speak of, stocks surged, that is, up until a most unexpected surprise came in the form of an epidemic that has infected over 17,000 people through February 3, nearly all in China.
You see, when stocks are priced for perfection, it leaves them vulnerable to disappointments or surprises.
Before I delve into the recent volatility, let me quote from Charles Schwab:
While it is impossible to predict the extent a virus can spread and have greater consequences than past epidemics, history indicates that the global economy and markets have been relatively immune to the effects of past epidemics. A key reason is that global health organizations are prepared for outbreaks and effective when mobilized. Combining these efforts with widespread public awareness and adoption of effective safety measures eventually limits the spread of the virus and its economic impact.
Given the more elevated levels in the stock market, the initial reaction among short-term traders has been to shoot first and aim later. We’ve seen it before; we’ll see it again.
The fear: the epidemic will slow economic growth in the world’s second-largest economy, and the impact will ripple across the globe.
It seems unlikely that we’ll see a direct health or economic impact in the U.S. So far, the CDC has said 11 people have tested positive in the U.S (through February 3). That compares to at least 19 million who have come down with the seasonal flu, resulting in at least 10,000 deaths through January 25.
Yet, that hasn’t stopped us from attending movies, hopping on airplanes, or going to restaurants.
We’ve seen global epidemics before. The World Health Organization declared an emergency during the 2016 Zika virus, the 2009 H1N1 swine flu, the 2014 Ebola outbreaks, and the outbreak of SARS in China in 2003.
I suspect the number of cases in China will continue to rise, and we may see additional volatility until investor confidence rises that China has the epidemic under control.
Medium- and longer-term, the economic fundamentals have historically had the biggest influence on equity prices. If you have any questions or concerns, I’d be happy to have a conversation with you. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch
MTD: returns: Dec 31, 2019—Jan 31, 2020
YTD returns: Dec 31, 2019—Jan 31, 2020
*in US dollars
MTD: returns: Dec 31, 2019—Jan 31, 2020
YTD returns: Dec 31, 2019—Jan 31, 2020
*in US dollars