By Pete Biebel, Senior Vice President
In last week’s article, “I’m Not as Sick as I Look,” I suggested that the damage in the market in the previous week was perhaps not quite as bad as that weekend’s headlines made it sound. Markets in the U.S. had succumbed to a nauseating plunge on the previous Friday. Financial markets around the world were suffering the effects of concern over the spreading coronavirus. The issue then was whether the market’s malady was just a 24-hour bug or the beginning of a longer-term affliction. Looking back now, the market’s dramatic return to health last week makes Ferris Bueller look like a slacker.
In that 1986 movie, Ferris fakes a sickness to avoid going to school, then spends the day rollicking with a couple friends in downtown Chicago. One minute he’s at Death’s door, then a few hours later he’s singing Danke Schoen on a parade float. A week ago, our stock market looked like it was heading for the ICU, but it must have just been playing hooky. A few days later it was making new highs, flexing its muscles and looking like it could run a marathon.
The snap-back rally on Monday was no big surprise. The previous Friday’s air pocket downdraft left a vacuum overhead so that a little bullish push to start the week could go a long way. The averages all gapped-up that Monday morning and recovered a healthy chunk of Friday’s loss in just the first hour of trading. But, as is typical of markets in questionable health, there was no follow-through on the early strength and the indices gave back about half of the gain over the balance of the session.
If Monday’s action got the market back on its feet, it was off to the races on Tuesday. After the Peoples Bank of China announced a massive liquidity injection, markets around the world all raced higher. Central bank liquidity injections have been the elixir that have been the market’s happy pills. So, when the PBOJ took that step in an attempt to fend off an economic slowdown that the coronavirus epidemic threatened, the markets were instantly able to ignore any other woes. The major averages in the U.S. gapped higher for the second consecutive day and continued higher through most of the session. In just the first hour of trading, the NASDAQ Composite (COMP) and the S&P 500 Index (SPX) had both climbed above their highs of the previous week. By the end of the session, COMP had climbed to a new all-time high. The market’s malady of last week had quickly become a distant memory. Danke schoen!
A third successive gap-up opening on Wednesday lifted SPX and the Dow Jones Industrial Average (DJIA) to very near their record highs. Both of those indices managed to reach new highs on Thursday when news that China would reduce tariffs on about $75 billion of U.S. goods along with news of better than expected Initial Unemployment Claim numbers helped the markets rally for a fourth consecutive session. Even after giving back much of Thursday’s gain on Friday, the major indices had a very good week. COMP ended the week with just over a 4% gain. SPX was up by a little over 3% and DJIA had a net gain for the week of 3% on the nose.
Six of the eleven S&P sectors rallied more that 3% for the week. Two of them, Technology and Basic Materials had a net gain for the week of more than 4%. Surprisingly, stocks in China also had a good week. One index of large-cap stocks there was up about 3 ½% for the week, but it’s still showing a net loss of just over 6% for the past five weeks. Bonds and fixed-income products were generally a bit lower for the week. The Energy sector, along with the interest rate sensitive Real Estate and Utilities sectors, were the only three of the S&P sectors that failed to climb back above the prior week’s high. Only the Utilities sector had a net loss for the week.
Now that the averages are back in the vicinity of their highs, we have to wonder how much healthier they can get. For the past two months, markets have rallied on all the good news. Progress on trade talks, an accommodative Fed, better economic data and even the conclusion of the impeachment trial have all been about the best the market could have hoped for. Now the market has demonstrated that it’s not too concerned about the spread of the coronavirus. It might be prudent to remind ourselves to not get too complacent during periods when no news is bad news.
The degree to which the coronavirus contagion spreads and impacts global economic activity is the wildcard for the markets in the weeks ahead. Auto manufacturers in Japan and Korea were among the first to closed-down plants due to supply chain disruptions. Over the weekend, other industries announced similar factory closings including some toy companies. If the rate of spread of the virus does not decrease soon, then it’s negative economic impact will likely increase.
Since the end of 2019, I’ve been guessing that SPX would spend most of the first quarter of the year in the 3100 – 3300 range. Of the 26 trading days so far this year, SPX has closed above 3300 on 8 of them. SPX ended the week near 3328; I suspect that it’s unlikely to see substantial progress above that level anytime soon. The index could decline into the 3230 – 3240 area without triggering any alarms; in fact, such a decline would merely fill the gaps left last week on the Tuesday and Wednesday openings. The 50-day average for SPX begins the week near 3221, breaking below that level would be at least a short-term negative. Falling below the low of Friday 1/31 near 3215 would be a very negative development.
The market will be fed another helping of political news with the results of the New Hampshire primary this week. The half-baked results from Iowa were insufficient to create any indigestion. It’s unlikely that the New Hampshire results will cause the market any digestive disorders. Markets in the U.S. seem to have already concluded that the Democrats are unlikely to cook-up enough support in the next nine months to take both the Presidency and a Senate majority.
Several well-known internet companies along with a few big biotech firms and a couple semiconductor stocks are among the companies scheduled to report results this week as the current earnings season winds down. We’ll also see the market reaction, if any, to Fed Chairman Powell’s testimony to Congress.
A word of warning for anyone shopping for Valentine’s Day goodies: The price of chocolate may have sweetened a bit lately. A lack of rain in the primary production areas of cocoa in West Africa has caused the price of cocoa futures to rally about 15% year-to-date.
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.