The concern du jour
Markets move on to the next fear.
Our Top Market Takeaways for the week ending January 24, 2020.
This week’s rundown
Heading into Friday, all major global stock indices were in the red, with consumer names hit particularly hard in the wake of a deadly virus outbreak in China. The virus has precipitated a global health scare, claiming at least two dozen lives and infecting hundreds. With several cities on lockdown, some authorities have expressed concerns over the potential economic toll of the disease, leaving investors on edge.
Before we get into what this virus is and its possible impact (see next section below), let’s do a quick speed round of what else to know from this week:
- It’s that time again. Q4 2019 earnings season ramped up, and almost 20% of companies in the S&P 500 have now reported. And so far, most have surprised to the upside. Of the some 80 companies that have posted results, 67% have beaten sales expectations and 72% have surprised on earnings expectations. All in all, we remain optimistic on Q4 earnings season: While consensus has expected earnings to contract -2% year-over-year, a stall in downward revisions signals to us that Q4 could post flat-to-positive earnings growth.
- Stock size matters. Market cap seems to be one of the most important factors for stock performance so far this year. The largest 50 stocks in the S&P 500 are up an average of +3.15%, with the next largest 50 with an average gain of +2.95%. Meanwhile, the smallest 50 stocks in the index are down an average of -0.98%. And as for narrowing leadership, Apple, Microsoft, Alphabet, Amazon and Facebook now account for 20.7% of the S&P 500’s market cap. So if you’re invested in the broad S&P 500, a fifth of that allocation is already invested in these five names.
- Another front to the trade war. While tensions between the United States and China may be on the backburner (for now), trade rhetoric ramped up between President Trump and European leaders. At the center of the discussion is what’s called a digital tax, which aims to impose levies on big tech companies that generate revenue in a given country—a big divergence from companies’ current practices of declaring profits where they are headquartered. So far, President Trump and President Emmanuel Macron agreed to postpone a French tax, but other countries like the United Kingdom and Italy appear to be moving forward with similar plans unless a global solution is found…despite U.S. threats to retaliate with tariffs on Europe’s auto industry.
- Invitation only. This week, a host of heads of state, policymakers and the who’s who of the business community gathered for the annual World Economic Forum (WEF) in Davos, Switzerland. The theme this year? “Stakeholders for a Cohesive and Sustainable World”—in human speak, attendees tackled big topics like climate change, fairer economies, the future of work, and technology for good. There have been a host of insightful sessions, but so far, no good pictures of central bankers on skis.
The concern du jour
The market’s concern du jour has shifted from military tensions between the United States and Iran to the outbreak of Novel Coronavirus (2019-nCoV). The virus, which first appeared just before the Lunar New Year holiday in Wuhan, China, is a relative of the common cold and more serious illnesses such as SARS and MERS. At this point, there have been more than 800 reported cases with 26 fatalities. The virus has spread to at least seven other countries, including the United States, Japan and Singapore.
While the human toll can be serious, as investors, we have to assess the potential economic and market impacts of the spread of the illness. The most prominent risk is that fear of contracting the virus reduces economic activity such as travel and consumption. There are several examples of similar illness scares (like H1N1, Ebola and Zika), but the most useful template for the ultimate impact is the SARS episode in 2003. Then, over 8,000 people in 29 countries were infected. Economic activity in China, the epicenter, did indeed slow. Sectors of the Chinese stock market that were particularly exposed to consumers, such as retail and casinos, took a hit. However, once the virus became contained, spending activity and markets snapped back. Similarly, during the Ebola scare, U.S. airline equities severely underperformed due to fears of contagion. Once those fears were calmed, they bounced back.
The chart shows Google search trends from 2008 through January 2020 for illness scares, including H1N1, Ebola, MERS and Zika. It displays the moments over this time period where each illness peaked in Google searches.
We certainly are not medical experts, but there are reasons to believe that SARS may be closer to a “worst case” scenario for nCoV. First, medical infrastructure in China and around the world has had 17 years to progress. Indeed, the Chinese have already mapped the genome of the virus, and while there have been some criticisms of the containment strategy, most indications are that medical staffs are better trained and more prepared. This suggests that market volatility (especially in Asia) may be elevated as the situation develops, but in our view, there is low likelihood of lasting impacts.
Overall, there is always a “reason” not to invest. Each year, there has been a host of events and headlines—many of which are serious—that have made investors nervous. While some of these did indeed have a short-term negative market impact, it’s important to keep in mind that historically, the S&P 500 has always recovered to its previous peak. So while reasons to be nervous and emotional when investing are ever present, that shouldn’t be enough to disrupt your goals and derail your investment plan.
The chart shows significant economic events from 1999 through 2020 and how they affected the price return of the S&P 500 Index.
All market and economic data as of January 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.
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