Outbreak Tests Faith in Global Economy Investors who began the year feeling largely sanguine about the stock market are struggling to make sense of whether a growing coronavirus outbreak could upend their bets on a global economic recovery.
(…) Charles Schwab analysts found the MSCI World Index declined 5.5% in the month after January 2016, when the Zika virus spread to several countries, but returned 2.9% over the course of six months. In their analysis of 13 outbreaks since 1981, analysts at the firm found the index returned an average of 0.8% over a one-month period following an outbreak and 7.1% over a six-month period.
Morningstar analysts came to a similar conclusion, finding that, among the companies they covered, none suffered a long-term effect from the 2003 SARS outbreak.
In other words, even when stocks have taken a short-term hit from disease-related worries, they have tended to bounce back in the following months. That is because in recent decades it has been rare, if not unheard of, for a contagious disease to bring consumer spending to a halt around the world.
Nevertheless, the timing of this year’s outbreak is in some ways more worrisome than that of prior cases. (…)
Should the coronavirus outbreak fail to stabilize by March, first-quarter growth in China could slow to below 6%, Société Générale economists said in a report. (…) And China’s economy is more interconnected to the global economy than it was when the SARS outbreak occurred in 2003, meaning a slowdown there could have widespread ramifications. (…)
Also to consider: in everyone of the above noted periods, at the outbreaks, equity valuation was never excessive and profits were on the rise or, in April 2009, clearly turning after a brutal decline.
This time, valuation is clearly excessive and profits are still in a slightly declining trend. Importantly, the world economy needs a sound China and an active consumer to counteract the weak Eurozone and the fragile U.S. economy.
This is from John Authers at Bloomberg:
(…) According to the Bloomberg commodity indexes, industrial metals have now under-performed precious metals over the period since Donald Trump was elected U.S. president; and the price of oil is collapsing anew relative to gold. These moves only make sense if people are worried about growth.
If we do have a growth scare then we would expect investors to run for the safety of the dollar. And that is exactly what they have done. The trade-weighted average of the dollar against its main trading partners is now above its 200-day moving average.
(…) as these charts show, growth concerns have been building for a while. The last few days have accentuated a trend, rather than showing some big shift in response to a shocking new event. So it is fair to say that the coronavirus is a catalyst for growth fears, or even being used as an excuse to retreat from bets on growth.
(…) there is intuitive sense to Dow Theory, which holds that we can expect a strong rally if a new high in the transports or industrials average is confirmed by a new high in the other. And so if we follow Dow Theory, the events of the last few days are discouraging. The transportation index has conspicuously failed to regain its high from 2018 (in the chart, the two gauges are indexed to that high). Or to put it another way, this looks like another clear case where worries about the economy show that we shouldn’t trust a rally in the stock market.
TECHNICALS WATCH
Lowry’s Research notes the “intense selling” in the last 2 sessions and says the market is still “well above an oversold level” concluding that the pullback may not be over.
The 100-day m.a. is at 3094 (-4.4%) and the 200-d m.a. at 3000 (-7.3%). At 3000, the Rule of 20 P/E would be 20.7 vs its current 22.1 level.
Remember that the Conference Board’s LEI was down 4 of the last 5 months, in spite of a rising equity market. SentimenTrader says that December’s big drop in the index
(…) ends one of the longest streaks of “not bad” readings since 1959.
When a long streak of readings higher than this finally ends, and when the LEI m/m is so negative despite stocks being at record highs, both indicate a low probability for further sustained gains over the shorter-term at least for the S&P 500.
EARNINGS WATCH
The next 2 weeks will be important as investors will want to see if earnings will start rising as expected in Q1’20. Equities tend to navigate storms better with an earnings tail wind.
We now have 85 S&P 500 companies in, a weak 68% beat rate (24% miss rate) but a +4.8% surprise factor. Aggregate earnings of those 85 companies are up 3.3%, much better than the –0.6% seen at the same time during Q3’19.
One week ago (most recent Refinitiv tally), 59 Russell 1000 companies had reported. The beat rate was 75% (20% miss rate) and the surprise factor also +4.8%. Q4’19 earnings are expected to decline 0.9% (-1.0% ex-Energy) but rebound 9.1% (9.4%) in Q1’20.
There wera 54 Russell 2000 companies that had reported: beat rate 67% (30% miss) with a +3.9% surprise factor. Q4’19 earnings are expected to increase 4.8% (+5.0% ex-Energy) and jump 15.2% (14.8%) in Q1’20.