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BMT Monday Market Insights – February 18, 2020

Market Insights

Top Weekly Themes

  1. Goldilocks inflation data, despite being at or close to full employment: The January Consumer Price Index (CPI) excluding food and energy rose 0.2% month-over-month and in line with expectations. Even with the strong January employment report and weekly jobless claims lower than anticipated, the Fed’s preferred measure of inflation, Core Personal Consumption Expenditure (PCE), is running well below the Fed’s 2% target. In addition, wage growth (3.1%) has been hovering at current levels for the last few quarters without showing signs of acceleration. In terms of investment implications, we believe low and stable inflation will assist in preserving elevated corporate profit margins, while also allowing the Fed to keep interest rates low.
  2. S&P 500 Earnings Returning to Growth: As we move beyond the mid-point of fourth quarter earnings season for companies in the S&P 500, it appears as though earnings growth has returned. According to data compiled by FactSet, Inc., with 64% of companies reporting, fourth quarter earnings are up 0.7% year-over-year as of February 7. This compares favorably to expectations at the end of 2019, which projected earnings to decline 1.7%. If the trend continues, it will mark the first quarter of earnings growth since the fourth quarter of 2018. As we discussed in our 2020 Economic and Investment Outlook, a key component of our mid-single digit S&P 500 returns forecast is a need for earnings growth. In contrast to the start of 2019, valuation multiples are now elevated and have less room to expand. Thus far, forward guidance for 2020 has been solid – typically, the consensus earnings forecast for the S&P 500 would have been revised down by 1.4% at this point in the year. Thus far, earnings expectations have only been revised lower by 0.4%.
  3. Fed Chair Jerome Powell heads to Congress: Chairperson Powell spent two days on Capitol Hill delivering his semi-annual testimony to Congress. His commentary was consistent with remarks delivered after the January Federal Open Market Committee (FOMC) meeting. Powell sees the U.S. economy growing at a moderate pace but is monitoring the impacts from the Coronavirus. He shares our view that there are signs global growth is bottoming and monetary policy is appropriate for the current environment. We think the Fed, as well as other central banks around the globe, are ready to ease monetary conditions further if the Coronavirus fallout becomes material.

Returns Table

Week (%) YTD (%) 1-Year (%) 3-Year (%) 5-Year (%) Div Yield (%)
Equities
S&P 500 0.9 4.7 25.0 53.8 78.2 1.68
Russell 1000 Value 0.5 1.4 17.1 30.1 49.6 2.39
Russell 1000 Growth 1.4 8.1 32.1 78.4 106.2 1.01
Russell 2000 1.0 1.6 11.4 26.7 48.5 1.32
MSCI EAFE 0.1 2.2 16.2 26.5 37.0 3.19*
MSCI Emerging 0.6 0.5 11.1 32.7 40.9 2.64*
Week YTD 1-Year 3-Year 5-Year Yield 
Fixed Income
Bloomberg/Barc US Aggregate 0.2 1.7 9.6 14.1 17.2 2.08
Bloomberg/Barc US High Yield 0.4 1.1 9.8 19.1 33.6 5.10
Bloomberg/Barc Muni Bond 0.1 1.7 8.4 15.8 20.2 1.51
Bloomberg/Barc Global Agg. Ex U.S. (0.1) (0.5) 4.9 12.5 11.3 0.82
Week YTD 1-Year 3-Year 5-Year Current Level
Commodities
Crude Oil (WTI) ($/bbl) 0.9 (15.8) (4.6) (2.9) (2.6) 51.4
Natural Gas ($/mmbtu) (1.9) (16.6) (29.1) (38.0) (34.9) 1.8
Gold ($/ozt) 0.6 3.7 20.2 28.6 28.4 1,575.1
Copper ($/mt) (0.2) (7.1) (6.6) (6.5) (0.3) 5,716.0
1 Week Ago YTD 1-Year Ago 3-Years Ago 5-Years Ago Current Level
Currencies
Euro/USD 1.10 1.12 1.13 1.06 1.14 1.08
USD/YEN 109.98 108.68 110.88 113.91 118.68 109.82
Pound/USD 1.29 1.32 1.29 1.25 1.54 1.31

As of February 13, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 12/31/2019

Click a chart to enlarge it.

Indexed Price Return
Source: FactSet, Inc.
Coronavirus Search Interest Over Time
Source: Google Trends (https://www.google.com/trends)

Key Takeaways

  • Have Coronavirus Fears Peaked? While China announced a significant increase in Coronavirus cases on Wednesday, following a new diagnostic methodology, equity markets have largely recovered from the January 31 low.
  • Interestingly, the bottom in global equity indexes aligns with the peak in worldwide search interest according to Google Trends data. This seems to imply the public’s interest in the topic has waned along with investors.
  • As we have discussed over the past few weeks, the ultimate outcome of the virus is unknown and its economic and market impacts are difficult to estimate – but It will almost certainly impact first quarter global GDP. Thus far, we have not seen any material market volatility as a result of the virus; however, we would continue to encourage investors to be on guard in the near term.
  • The market has shrugged off most of the decline as the Chinese government has increased stimulus to help offset the economic impact. Recent stimulus includes the People’s Bank of China (PBOC) reserve requirement cuts, reduction of short-term money market rates, and directing banks to lower the cap rates on loans for certain firms.
  • China announced earlier this month its intention to reduce tariffs on $75 billion of U.S. goods, effective February 14. These products include U.S. crude oil and agricultural commodities as the Chinese government looks to keep prices under control following an increase in inflation data amid the Coronavirus.

Commentary

As we discussed in our 2020 Economic & Investment Outlook, we do not believe it is prudent to make long-term investment decisions based on the expected outcome of a U.S. presidential election. However, it can be useful to understand the potential scenarios, while also analyzing how the market is pricing in different outcomes.

With two democratic primaries now complete and the tendency for early winners to gain momentum throughout the race, it seems clear Bernie Sanders is benefiting from a split moderate field and deteriorating support for former Vice President Joe Biden. The reaction thus far from the market has been almost in lockstep with the rise in probability of Trump being re-elected, following this fragmenting of the Democratic field.

While it is certainly too early to determine an outcome, these early indications are consistent with the analysis in our 2020 Outlook. Since 1933, an incumbent president has never lost when avoiding a recession during the two years leading up to the election. Markets also like consistency. Whether Democrat or Republican, in years where the incumbent wins re-election the S&P 500 has returned an average of 10%. This is in contrast with years where the incumbent loses, during which the S&P 500 has returned an average of 2.8%. Making no political judgments of any kind, and if we are correct in forecasting continued economic growth in 2020, historical precedent would mean a Trump victory is probable, as are solid stock market returns.

S&P 500 & Trump's Probability of Being Re-elected
Source: Strategas Research Partners

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