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By Pete Biebel, Senior Vice President

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Market activity over the past few weeks has been dominated by reactions to developments in the spread of the coronavirus.  It’s reminiscent of how the market responded late last year to the yin and yang of news on progress in the trade talks with China.  Even the flimsiest hint of good news could launch the averages higher.  When the occasional splash of bad news hit, the market might have jerked lower in an initial reaction, but it seemed to be able to conveniently wipe away any memory of the news in short order.

Stocks opened lower Tuesday morning following reports of larger than expected increases in the number of coronavirus cases and fatalities over the long holiday weekend.  But, by midday, all was forgotten and the averages recovered most of their early losses through the second half of the session.  News of the contagion’s spread was a little healthier Wednesday morning, so stocks gapped higher on the opening and, even though the averages finished near their lows of the day, they still ended the day with solid gains.  Both the NASDAQ Composite Index (COMP) and the S&P 500 Index (SPX) touched new record highs.

That was also the day that got people talking about the Big Numbers.  The high on SPX Wednesday was a bit below 3394, just 0.18% below 3400.  COMP topped out near 9838, just over 1.6% under the 10,000 mark.  The best the Dow Jones Industrial Average (DJIA) could do that day was 29,400, about 150 points below the high of the previous week, but still within 2% of the 30,000 level.  I suspect that roughly half of the market participants who noticed the proximity to the big numbers believe that, now that we’re within the gravitational pull of those levels, the market averages will surely be drawn to them.  I suspect the other half believes that those big number levels will act as a brick wall the first time the averages approach them.  Such traders are apt to ramp up their selling as those indices near those big numbers for the first time.

That may have been one of the factors in play on Wednesday when SPX stalled repeatedly within a whisker of the 3400 level before easing lower.  The market attempted to rally again Thursday morning even in light of news of a surprising number of coronavirus cases in South Korea.  About ninety minutes into the session, a headline revealed that the contagion had caused a steep decline in sales of smart phones in China.  That news sparked a brief but violent decline in stock prices, especially those of many of the high-flying tech companies.  The averages recovered much of that air-pocket decline over the balance of the session.  For the day, SPX lost about 0.4% while COMP dropped about 0.7%.

As more and more companies revealed their concerns about the degree to which the contagion would impact their businesses, the potential for significant economic impact was becoming hard to ignore.  The markets can be callously ignorant of the number of fatalities in any given worldwide disaster, but when it starts to impact economic growth and corporate profits, the markets care deeply.  So, on Friday morning, when the IHS Markit’s flash reading of business activity registered its lowest level in more than six years, markets noticed.  Stocks not only gapped lower that morning, they also continued to slide lower through most of the session.  SPX lost a bit more than 1% for the day; COMP fell nearly 1.8%.  DJIA declined a relatively modest 0.78% but closed at its lowest level in 2 ½ weeks.

For the week, the major averages lost between 1.25% and 1.6%.  The Technology sector was the week’s biggest loser, falling 2.3%.  Several Technology subsectors, including the Semiconductor, Solar Energy and Cloud Computing groups lost 2 ½% to 3%.  The interest rate sensitive Real Estate sector was the only U.S. equity sector to squeak through the week with a net gain, up about ½%.

Several markets, other than U.S. equities, seem to have been impacted to a greater degree.  Gold has rallied for seven straight days, reaching its highest price level in about seven years.  And that was despite continuing strength in the U.S. Dollar.  The Dow Jones U.S. Dollar Index has been climbing steadily since the beginning of the year.  Last week it reached its highest level in nearly three years.  The flight to safety was also apparent in bond prices.  The rush to buy Treasuries pushed the yield of the benchmark Ten-Year Notes down to 1.47%, near its September low.  Yields on longer-dated Treasuries hit record lows; the Thirty-Year Bond yield hit 1.89% intraday and ended the week at 1.917%.

News on the coronavirus seems likely to get worse before it gets better.  This weekend brought news that outbreaks in South Korea and Italy seem to be much worse than was initially perceived.  As the U.S. stock index futures resumed trading on Sunday evening, they were all showing losses of more than 1 ½%.  SPX, which ended last week near 3338, will try to find support in the 3275 – 3300 area.  Failing that, the critical area seems to be near 3200, roughly the area of the late-January low.  If that level is taken out, that would indicate that stocks probably just saw an intermediate-term high.

This week brings a long list of economic reports with several significant updates coming on Thursday.  In addition to the weekly Unemployment Claims number that day, the data on GDP and Durable Goods could spark a market reaction.  Keep in mind that the GDP number will be for 2019’s fourth quarter and therefore will not reflect any impact of the coronavirus.  This late in the earnings season there are still more than a few stragglers due to report, but the list includes more than enough of the glamor names to be entertaining.

Date Report Previous Consensus
Tuesday 2/25/2020 FHFA House Price Index, M/M +0.2% +0.4%
S&P/Case-Shiller Home Price Index, M/M +0.5% +0.4%
Consumer Confidence 131.6 132.5
Richmond Fed Manufacturing Index +20 +10
Wednesday 2/26/2020 New Home Sales, M/M -0.4% +2.7%
Thursday 2/27/2020 GDP, Q/Q. SAAR +2.1% +2.2%
Personal Consumption +1.8% +1.8%
Durable Goods Orders, M/M +2.4% -1.5%
Durable Goods Orders, ex-Transportation, M/M -0.1% +0.2%
Initial Jobless Claims 210K 210K
Pending Home Sales -4.9% +2.0%
Friday 2/28/2020 Personal Income, M/M +0.2% +0.3%
Personal Spending, M/M +0.3% +0.3%
Goods Trade Balance, Trade Deficit $68.3B $68.4B
Wholesale Inventories, M/M -0.2%
Chicago PMI 42.9 46.0
Consumer Sentiment 100.9 100.5

 

Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.

February 24, 2020 |