HIGHLIGHTS:
Equities bounced back despite coronavirus risks.
Via Nova’s outlook remains positive but we expect bouts of volatility.
Equities bounced back despite coronavirus risks.
The S&P 500 rebounded in the latest week to a record high despite ongoing concerns that the coronavirus outbreak could slow the global economy. The early impact of the virus outbreak on the markets in the second half of the January was significant, eliminating early market gains. However, a combination of firm economic data, better than expected fourth quarter earnings reports and better-than-feared management comments on the impact of the virus allowed investors to breathe a sigh of relief.
The S&P 500 surged over 3% for the week and year to date. Technology stocks have outperformed the rest of the market, while energy stocks fallen over 10% so far this year. Small cap and international stocks also rose but lagged the S&P 500 and remain slightly negative year to date.
The caution and concern raised by the coronavirus benefited more defensive or “safe-haven” investments such as Treasury bonds and the value of the dollar. The 10-year Treasury yield rose slightly for the week but was down nearly ½% since year end. The fall in yields has given fresh impetus to the housing market through lower mortgage rates. However, the modest rise in the value of the dollar, while a positive for buyers of imported goods, is a headwind for exporters.
Via Nova’s outlook remains positive but we expect bouts of volatility.
While we acknowledge the increased risks represented by the coronavirus and rising Middle East tensions, the global economic landscape is notably more positive entering 2020. U.S./China trade relations are moving in a positive direction, global manufacturing surveys have improved, the USMCA agreement has the President’s signature, and the UK’s Brexit initiative is finally underway. Importantly, earnings prospects are improving, and central bankers intend to keep interest rates low. We believe these factors support a higher stock market. Stock market valuations are relatively high but not excessively so in our opinion, given the persistently low level of inflation and interest rates. Low inflation and interest rates raise the value of future corporate profits and, with it, stock valuations.
While our outlook is positive, we also believe market volatility will be ever present in 2020. It is worth noting that the current bull market, the longest in history, has endured 19 declines of at least 5% or more, each on bad news that followed a healthy advance. We expect at least the usual amount of market volatility this year if not more.
The coronavirus remains our biggest concern at present. Tensions with Iran are also very high, and while few analysts expect a significant escalation in the conflict, risks remain elevated. Here at home, the negative atmosphere generated by the recently concluded impeachment trial event could easily affect the November election results. Stock prices will likely gyrate with each new political poll.
Our most likely scenario is positive for the stock markets. We believe the economy will likely remain in an expansion at least through 2020, and that sales and profits growth will reaccelerate. Stocks have more upside potential in this environment, but as outlined above, we won’t take anything for granted.