By Pete Biebel, Senior Vice PresidentPrint This Post
The stock market was in the peak of health for the past several months. Since coming off its early-October low in the mid-2800s, the S&P 500 Index (SPX) made a new high later that month and continued its merry jaunt into the low-3300s by mid-January. The result was a fairly spectacular gain to date of about 16% in just three months. Unfortunately, or thankfully, that big run created an overbought condition. That steep short-term rally stretched the major indices to well beyond their long-term moving averages. As strong and vigorous as the market had been, the sprint of the past three months left it winded and overdue for a breather.
In such a condition, it’s easy to get a little overconfident and complacent. It’s also easy to succumb to the fear of missing out and buy too aggressively at the wrong time. It results in a market that is far more likely to see flat or negative returns in the near future as opposed to significant additional gains. It’s also a condition in which a little bad news can go a long way.
As I wrote two weeks ago, “The major averages all hit new highs again last week. In fact, as was the case in the prior week, and the week before that, and the week before that, they hit new highs a couple times each week.” That pattern continued over the past two weeks. The new highs last week were just a scant one-half percent or so above the highs of the previous week and came on a gap-up opening Wednesday morning that was largely inspired by a handful of big- name earnings reports.
But that’s when the first of the bad news hit. Just an hour or so into the session, news that the coronavirus contagion was becoming more widespread and deadlier took some of the life out of the rally. The averages eased lower and, by the end of the day, they had given back all of the opening gains.
Thursday was the opposite. Markets worldwide were lower that morning after officials in China locked down several major cities in response to the spreading virus. The U.S. indices hit new lows for the week on the opening that morning, but those lows proved to be the lows of the session. Bullish earnings results were again the elixir that provided temporary relief from the market’s concerns over the coronavirus. Both the NASDAQ Composite Index (COMP) and SPX recovered to post small net gains for the day.
On Friday morning it seemed that the news on the coronavirus was getting worse at an increasing pace. After a modestly higher opening, the averages skidded lower for most of the day. The averages fell below their Thursday lows around midday and continued lower. COMP lost 0.93% on Friday, dropping it to a 0.79% loss for the week. SPX fell 0.90% for the day, increasing its loss for the week to 1.03%.
The market’s health did clearly deteriorate late last week as the impact from the coronavirus spread. So far, the damage in stocks has been well contained, especially considering the overbought condition of the averages. Over just the next few days we’ll be watching the market’s vital signs for indications of whether they see quick improvement, or they continue to deteriorate. Upward momentum has been strong, so any respite in the spread of the contagion could bring the market a speedy recovery.
The flipside of investors rushing out of stocks last week was their rush into “flight to safety” assets. Treasury Notes and gold, among others, enjoyed sizeable rebounds. Safety seekers bid up the price of Treasury Notes and Bonds; the yield on the benchmark Ten-Year, which began the week near 1.82%, was forced down to 1.688% by week’s end, its lowest yield in about three months. The price of long Treasuries rallied about 3% for the week, outpacing any of the equity sectors. Gold gained about $10 per ounce for the week, most of that on Friday, and ended the week near its high of the year.
Crude Oil had a more severe reaction to the news. The first week of the coronavirus news has already had a significant impact on travel and threatens to be a drag on global growth. As a result, the price of Crude fell from $58.71 per barrel on Monday to end the week at $54.29, its lowest price in nearly three months. In early trading of Crude futures Sunday evening, the price was down another 3% to around $52.60 per barrel.
Not so surprisingly, Energy was the weakest of the U.S equity sectors last week. The S&P Energy Sector Index fell more than 4% last week and has now lost nearly 8% over the past five weeks. At the bottom of the list of weekly performance was an index of large-cap stocks in China which plunged about 6%. At the top of the list, along with long Treasuries and Gold were a pair of interest rate sensitive sectors. Utilities gained about 2.4% and Real Estate squeaked by with about a 0.4% gain.
SPX ended last week near 3295. Any further decline beyond the losses of late last week will break the short-term uptrend off the October low. We can expect a band of support beginning in the 3250 area and extending into the low- 3200s. Upward momentum at the recent highs was very strong, so the odds are pretty good that the short-term drawdown won’t fall much beyond that range.
In addition to developments in the virus contagion and the impeachment hearing, the market will be digesting news from a couple other appetizing sources. The quantity and significance of earnings reports this week provides a smorgasbord of tasty opportunities for significant moves, up or down, in individual stocks. The midweek Fed policy statement and press conference is expected to be rather bland, but any hint of unexpected spice could roil the markets temporarily.
|Monday 1/27/2020||New Home Sales, M/M||+1.3%||+1.5%|
|Dallas Fed Manufacturing Index||-3.2||-1.6|
|Tuesday 1/28/2020||Durable Goods Orders, M/M||-2.1%||+0.4%|
|Durable Goods Orders, ex-Transportation, M/M||-0.1%||+0.3%|
|S&P/Case-Shiller Home Price Index, M/M||+0.4%||+0.4%|
|Richmond Fed Manufacturing Index||-5||-3|
|Wednesday 1/29/2020||Goods Trade Deficit, December||$63.0B||$65.0B|
|Wholesale Inventories, M/M||-0.1%||-0.1%|
|Pending Home Sales, M/M||+1.2%||+0.7%|
|FOMC Policy Statement and Press Conference|
|Thursday 1/30/2020||GDP, Fourth Quarter, Annual Rate||+2.0%||+2.1%|
|Personal Consumption, Q/Q||+4.6%||+2.0%|
|Initial Jobless Claims||211K||215K|
|Friday 1/31/2020||Personal Income, M/M||+0.5%||+0.3%|
|Personal Spending, M/M||+0.4%||+0.3%|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.