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BMT Monday Market Insights – February 24, 2020

Market Insights

Top Weekly Themes

  1. Coronavirus update: According to the World Health Organization (WHO), the number of individuals confirmed to have been infected with the virus now stands at over 76,000. Sadly, there have also been over 2,200 fatalities. Thus far, however, the outbreak has been largely contained to China, with WHO reporting a little over 1,000 cases outside that country. New infections have declined over recent days, leading to the hope that the steps being taken to contain the disease are having positive results. Still, given the less than complete information available from China, it is far too early to conclude the risk of the virus is abating. With respect to its economic impact, with much of China’s economy hindered, growth rates within that country, and worldwide, will clearly be impacted during at least the first quarter.  The ultimate economic impact is unknown, but Cornerstone Macro estimates that if China’s factories remain closed past February, the hit to U.S. Gross Domestic Product (GDP) would be roughly 0.25% per month starting in March and probably grow exponentially thereafter.
  2. Bellwether Apple pares guidance due to Coronavirus: The news from Apple over the past few weeks evidences just how fluid the situation is with respect to the quickly escalating Coronavirus. When Apple announced earnings on January 28, the company painted a rather optimistic picture for the next quarter, forecasting sales that were well above analyst estimates. Less than three weeks later, while the markets were closed in observance of Presidents’ Day, Apple reversed course and indicated that its revenue guidance would not be met due to the situation in China. In off hours trading, Apple’s stock was down 6% on this news, but by the close of trading on Tuesday, the shares had pared that loss to just 1.8%. The company indicated in its press release that they deemed this to be a temporary issue and investors eventually concurred.
  3. S&P 500 posts new all time high as stocks look past the near-term headwinds: Somewhat similar to the stock of Apple, the S&P 500 started the shortened holiday week trading lower, only to recover most of those losses by late Tuesday. Then, equities rebounded on Wednesday and registered an all-time closing high. Against the backdrop of the virus induced decline in bond yields, the S&P has been largely supported by bond like proxies (REITS and Utilities) and its exposure to growth sectors.  The recent price action, at least so far, evidences that the broader market is also looking past the slowdown produced by the Coronavirus, and believes that growth will rebound later this year.  We would argue that the market is being a bit complacent about the potential impact of the virus in the near-term. However, thinking about the balance of 2020, we also believe it is hard to be too negative given the monetary policy backdrop, improving economic fundamentals, and better than expected forward guidance on corporate earnings.

Returns Table

Week (%) YTD (%) 1-Year (%) 3-Year (%) 5-Year (%) Div Yield (%)
Equities
S&P 500 0.0 4.7 23.5 52.2 77.0 1.69
Russell 1000 Value (0.2) 1.2 14.9 28.7 48.9 2.40
Russell 1000 Growth 0.5 8.6 31.8 77.3 104.6 1.01
Russell 2000 0.2 1.8 8.8 26.2 47.7 1.32
MSCI EAFE (0.4) 1.8 14.1 25.8 34.1 3.19*
MSCI Emerging (0.3) 0.3 10.1 32.1 40.3 2.64*
Week YTD 1-Year 3-Year 5-Year Yield 
Fixed Income
Bloomberg/Barc US Aggregate 0.5 12.2 9.8 14.5 18.2 2.02
Bloomberg/Barc US High Yield 0.1 1.3 9.6 19.2 33.3 5.13
Bloomberg/Barc Muni Bond 0.4 2.1 9.5 16.4 20.7 1.45
Bloomberg/Barc Global Agg. Ex U.S. (0.5) (1.0) 3.7 11.5 10.9 0.79
Week YTD 1-Year 3-Year 5-Year Current Level
Commodities
Crude Oil (WTI) ($/bbl) 4.8 (11.8) (5.7) 0.2 6.0 53.9
Natural Gas ($/mmbtu) 5.1 (12.3) (27.2) (32.3) (34.9) 1.9
Gold ($/ozt) 2.6 6.4 20.3 30.6 34.2 1,616.6
Copper ($/mt) 0.2 (6.9) (9.8) (3.5) (0.4) 5,730.0
1 Week Ago YTD 1-Year Ago 3-Years Ago 5-Years Ago Current Level
Currencies
Euro/USD 1.08 1.12 1.13 1.06 1.14 1.08
USD/YEN 109.82 108.68 110.77 113.12 118.76 112.09
Pound/USD 1.31 1.32 1.31 1.25 1.54 1.29

As of February 20, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 12/31/2019

Chart of the Week

Click the chart to enlarge it.

Chart: Mortgage Bankers Association, Weekly Mortgage Refi. Applications
Source: FactSet, Inc.

Key Takeaways

  • Numerous companies have indicated that their financial results will be negatively impacted by the current events in China. The reaction within the market to-date has generally been to view this as a short-term economic headwind that will not have any long-lasting impact. While the jury is out on that being the correct assessment, actions taken by China should help to lessen the economic impact and position the country for increased growth once the virus is contained.
  • Specifically, China has taken multiple steps via economic stimulus measures over the past few weeks to support the economy during this challenging period. Not only will these measures help in the near-term, but once the Chinese economy returns to a more normal state, they should add to the pace of the rebound.
  • Looking to the United States, the rerating of growth has pushed bond yields sharply lower since the end of last year, which has led to a dramatic uptick in mortgage refinancing. With consumers being the engine of the U.S. economy, reduced monthly mortgage payments should support increased spending over the balance of the year.

Commentary

While the U.S. Presidential Election is now less than nine months away, the formal process of selecting the Democratic nominee has barely just begun. To-date, only Iowa and New Hampshire have finished voting (Nevada voted this past Saturday), with Iowa’s recounting yet to be finalized. This translates to less than 2% of the total 3,979 delegates which will be contested between now and June 6.

Senator Sanders and Mayor Buttigieg are essentially tied as to their delegate count at this time, but the field is still relatively crowded – and about to pick up another participant. Starting on Super Tuesday (March 3), Michael Bloomberg will join the fray, as his name will not appear on the ballot in the first four states to vote. The chart below displays the cumulative delegates that will be awarded over the primary voting season, with Super Tuesday also noted. Now less than two weeks away, Super Tuesday is certainly worthy of its title, as over one-third of the delegates are slated to be awarded on that day alone.

Chart: 2020 Democratic Primary Calendar; Cumulative Delegates
Source: Bryn Mawr Trust

Even though he was a late entrant, recent results from Predictit actually show Mayor Bloomberg trailing only Bernie Sanders as the likely nominee. This is no doubt due to the massive advertising he has personally bankrolled and in spite of his debate performance last Wednesday that was largely panned by the press. While early in the process, as the chart above details, the delegate count will ramp quickly over the next few weeks.

Interestingly, while it has not occurred for the Democratic Party since 1952, Predictit also shows the likelihood of a brokered convention to be better than 50%. That is, a convention where no candidate has amassed a sufficient number of delegates to win the nomination on the first ballot.  This unfolding primary is sure to impact the financial markets given the divergent views for the economy and tax policy put forth by the remaining candidates.

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