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BMT Monday Market Insights – February 10, 2020

Market Insights

Top Weekly Themes

  1. January employment report much better than expected, and wage growth still moderate: January nonfarm payrolls of +225K beat consensus for a 161.5K gain. Perhaps even more critical for stocks, average hourly earnings remained muted at 3.1% year-over-year growth.  Solid, but not rapidly accelerating, wage growth is what equity investors want.  If labor costs are stable, corporate profits may come under less pressure than many expect, while consumers remain in a healthy position.  Muted wage growth also underscores a benign inflation backdrop, unlikely to provoke interest rate increases by the Federal Reserve.
  2. Stocks continue to climb the Wall of Worry: the coronavirus, a flattening yield curve, Bernie Sanders surging in the democratic polls – the list of worries for the market continues to grow. Perhaps counterintuitive, we think adding a few bricks to the Wall of Worry might be a good thing for the longevity of the bull market.  You can jog much longer than you can sprint, and the market has been sprinting higher since last fall.  The proverbial Wall of Worry keeps investor sentiment in check, allowing the market to rise in a more orderly manner.  We are already seeing the impact on investor sentiment.  The AAII Bull – Bear spread was 20 (20% more bulls than bears) two weeks ago.  This is much more bullish than average, and often means investors are becoming a bit too optimistic.  Today, that reading has pulled back to -1, a good bit below average.  A dose of skepticism can be very healthy for stocks.
  3. Coronavirus still a risk: the number of reported cases is now over 30,000 with the death toll at 600. Additionally, companies are reporting supply chain disruptions and factory closures amid increasing travel restrictions and quarantines.  We believe that the market may still be impacted by the virus, and economic data in the first quarter will surely be affected.  That said, China will continue to throw money at the problem, with more economic stimulus very likely.  This stimulus comes on the heels of a global monetary policy easing cycle that has now lasted over a year.  In our view, this will be an important cushion for the global economy, and it increases the likelihood of a sharp rebound once the virus dissipates.

Returns Table

Week (%) YTD (%) 1-Year (%) 3-Year (%) 5-Year (%) Div Yield (%)
Equities
S&P 500 (1.0) 0.7 21.3 50.4 75.0 1.75
Russell 1000 Value (1.4) (1.8) 14.4 27.9 47.2 2.42
Russell 1000 Growth (0.6) 3.4 27.6 73.8 102.3 1.05
Russell 2000 (1.0) (2.1) 9.1 24.4 45.2 1.34
MSCI EAFE (0.6) (1.2) 12.6 24.6 34.1 3.19*
MSCI Emerging (1.1) (3.5) 6.4 29.2 36.7 2.64*
Week YTD 1-Year 3-Year 5-Year Yield 
Fixed Income
Bloomberg/Barc US Aggregate 0.2 2.0 9.9 14.3 17.2 2.03
Bloomberg/Barc US High Yield 0.1 0.1 8.7 18.1 32.6 5.47
Bloomberg/Barc Muni Bond 0.1 1.8 8.6 16.0 19.8 1.48
Bloomberg/Barc Global Agg. Ex U.S. 0.0 0.5 5.3 12.9 12.5 0.79
Week YTD 1-Year 3-Year 5-Year Current Level
Commodities
Crude Oil (WTI) ($/bbl) (3.9) (17.9) (7.2) (5.5) (3.1) 50.5
Natural Gas ($/mmbtu) (0.5) (16.9) (31.7) (40.4) (29.5) 1.9
Gold ($/ozt) (0.4) 3.8 20.4 28.2 27.8 1,574.0
Copper ($/mt) (0.5) (9.1) (9.9) (3.3) (1.7) 5,726.0
Week YTD 1-Year 3-Year 5-Year Current Level
Currencies
Euro/USD 0.41% 2.04% 3.86% (2.81%) 2.58% 1.10
USD/YEN 0.21% (0.43%) 0.42% 4.30% 7.63% 109.14
Pound/USD 1.06% 2.05% 0.68% (3.61%) 15.69% 1.30

As of February 6, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 12/31/2019

Click chart to view.

Feb. 10, 2020 - Chart of the Week
Sources: FactSet, Inc; BMT

Key Takeaways

  • For several months we have discussed the likelihood of a bottoming in global manufacturing, as represented by the Institute for Supply Management’s Purchasing Managers Index (PMI).
  • The change in interest rates over the past 24-months has a strong relationship with the future direction of manufacturing.
  • We are now just starting to see the true impact of lower interest rates on the economy. Given this relationship, we continue to believe manufacturing data will improve as we move through 2020.
  • The most recent PMI reading was reported at 50.9 versus expectations for 48.5 and the prior month reading of 47.8. One reading does not make a trend, however this is directionally what we have been expecting.  It is worth pointing out that this data was collected pre-coronavirus, but it is evidence that fundamentals were/are in the process of firming.
  • As discussed below, this may have important implications for corporate earnings.

Commentary

Per our 2020 Outlook, “we believe 2020 will be a year where earnings growth will likely be the primary driver of equity market returns, with valuation expansion/contraction being a less significant factor when compared to 2019.”

Therefore, the trajectory of earnings growth will be critical to the market’s ability to advance.  As discussed in the Chart of the Week, we believe manufacturing is in the process of bottoming.  This is important because of the historical relationship between leading economic indicators, like manufacturing, and positive earnings revisions.

In the past, as manufacturing data improves, the percentage of positive earnings revisions also begins to increase.

U.S. ISM Mfg v S&P 500 EPS Revisions

Sources: Cornerstone Macro; BMT

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