Week 7 Sitrep

What a bounce-back week for U.S. stocks! After plunging more than 2% for the week ended January 31st, the S&P 500 rallied back more than 3% last week. The markets had been flat for the year ending in January but now show a healthy 3.17% return for the year and a whopping 25.45% return over the prior 12 months. The NASDAQ index delivered the greater performance last week, up more than 4%. Interestingly, the NASDAQ had also been down less than other markets the week before.1 International stocks continue to lag their U.S. counterparts and are showing a slightly negative return for the year so far.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 2/10/20

 

Technology was the leading sector last week (again) while the health care sector managed to stage a comeback, up more than 4%. Energy and materials continue to lag for the year as earnings results have not offered much encouragement to investors. Large growth companies continue to lead all asset classes with returns better than 6% for the year. Large value companies are slightly positive for the year while small value companies are down more than 3%. The difference in returns between growth and value continue to warrant an overweight to the growth category.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 2/10/20

 

For those who thought they were getting a breather in stock prices and an opportunity to buy more at lower prices, the opportunity vanished rather quickly. A 3% weekly gain is not a frequent occurrence as the last time it happened was June 2019. We have often stated that the stock market hates uncertainty and will usually trade down or sideways when uncertainty rises. It is safe to say that the last four months have been marked with declining uncertainty, whether you’re counting the trade issues, economic growth, impeachment or pandemics. The S&P 500 Index has continually traded above its 50-day moving average since October 2019.2

Source: Bespoke Investment Group, The Bespoke Report, 2/7/20

 

Although the duration of the stock market pullback was shortlived, it is useful to examine what caused the markets to go down as sharply as they did. The three primary causes of uncertainty we have discussed include:

  • The coronavirus outbreak in China (and globally to a lesser degree)
  • The impeachment hearings for President Trump (not an uncertainty now)
  • The alteration of the Federal Reserve’s balance sheet (less obvious)

Clearly the coronavirus has captured the most headlines as we still try to grasp the full extent of the virus and its impact on global economies. Given the concentration of the outbreak in China, it appears that commodity investments have been the most affected.

Source: State Street Global Advisors, February SPDR Monthly Chart Pack, February 2020 Editino

 

One key risk regarding the coronoavirus that has been cited is whether the data being reported from the Chinese government is reliable or if the number of people affected has been understated. As of last week, the stock markets appear to believe that the new cases being reported is falling along with the potential death rates.3 While stocks have staged significant rebounds on this news, broader commodity markets have experienced a limited recovery.  The CRB Commodity Index is down more than 8% in the first five weeks of the year.

Source: Bespoke Investment Group, The Bespoke Report, 2/7/19

 

The impeachment hearings appear to have ended with little change to the political environment as we enter the beginning of primary voting season. Historically, we should expect to see additional volatility as we get closer to the larger primary voting dates such as Super Tuesday and convention season. We have also witnessed larger volatility in the month leading up to the actual election as well.4

Source: State Street Global Advisors, February SPDR Monthly Chart Pack, February 2020 Editino

 

We are slightly more than halfway through earnings season and the results have been mixed. According to John Butters at Factset Insight, 71% of companies in the S&P 500 that have reported earnings are delivering better than expected results.5 While the overall number is impressive, the result is slightly lower than the five-year average. We continue to see a strong divergence in earnings results among the various stock sectors. Strong earnings results coming from the technology, communication services and health care sectors show better than 80% of companies beating their earnings estimates. However, the net results from the energy and real estate sectors have been a drag on averages with only 46% of companies beating their earnings estimates.6

Source: Factset Insight, S&P 500 Earnings Season Update, Feb. 7, 2020

 

U.S. companies continue to exceed expectations in earnings growth rates. The most recent earnings reports show that earnings growth for the 4th quarter of 2019 is 0.7% while the forecast had been for a negative earnings growth quarter.7 Assuming the market can hold the positive earnings growth for the quarter, this will be the first time the index has reported year-over-year earnings growth since the 4th quarter of 2018.8 Once again, there is a stark divergence in the earnings growth rates coming from various stock sectors. Earnings growth has been slowed dramatically by stocks in the energy, industrials, consumer discretionary and materials sectors. The brightest spots for earnings growth has been communication services and technology.

Source: Factset Insight, S&P 500 Earnings Season Update, Feb. 7, 2020

 

Our short-term market indicator remains negative since last Friday as we saw several market sectors experience weaker demand. The overall picture for U.S. stocks remains in strong demand for the long- and intermediate-time frames. When the short-term indicator turns negative, we are encouraged to be cautious with new money going into the markets and will usually engage in a strategy to periodically invest over a period of weeks or months depending on an individual’s long-term goals. We will continue to monitor the supply/demand indicators for additional changes in the weeks ahead. Currently, our portfolio remains focused on large U.S. companies with high quality measures and a significant underweight to international stocks.

U.S interest rates rose slightly last week as the key risks from the coronavirus and impeachment hearings subsided. Key interest rates remain at relatively low levels historically as the 30-year U.S. Treasury Bond is just over 2%. Generally, we would expect interest rates to rise when economic activity picks up and rates fall when the economy is slowing and risk is rising. The low interest rates continue to bolster new home building and refinancing. The average 30-year fixed rate mortgage remains below 4%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 2/10/20

 

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935 or send an e-mail to cameron.malott@engravewealth.com. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:

1. J.P. Morgan Asset Management, Weekly Market Recap, 2/10/20
2. Bespoke Investment Group, The Bespoke Report, 2/7/20
3. Bespoke Investment Group, The Bespoke Report, 2/7/20
4. State Street Global Advisors, February SPDR Monthly Chart Pack, February 2020 Editino
5. Factset Insight, S&P 500 Earnings Season Update, Feb. 7, 2020
6. Factset Insight, S&P 500 Earnings Season Update, Feb. 7, 2020
7. Factset Insight, S&P 500 Earnings Season Update, Feb. 7, 2020
8. Factset Insight, S&P 500 Earnings Season Update, Feb. 7, 2020

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