The new year got off to a somewhat rocky start, as the effects of the Wuhan coronavirus outbreak continue to make their way through financial markets. As of this writing, there have been over twenty thousand confirmed cases and 426 deaths, with comparisons being drawn to the SARS epidemic of 2002-2003. While the full economic impact of the coronavirus outbreak won’t be known for a number of months, US equity markets have been relatively insulated from damages thus far, with the S&P 500 index falling a mere -0.04% in January. The impact overseas was a bit more dramatic, as the MSCI ACWI ex-US Index declined -2.7% on the month, with the damage to Chinese stocks the most pronounced at -4.8%. Travel bans and business closure are two examples of how attempts to curb the spread of the virus will dampen economic activity, though these effects should likely be transitory.
Elsewhere, fixed income markets rallied as investors flocked to the safety and stability of bonds, with the Barclays US Aggregate Bond index gaining +1.9% in January. 10-year Treasury yields fell roughly 40 basis points from 1.9% to 1.5% in anticipation that global central banks may be forced to cut rates in response to economic weakness. Gold prices, another traditional hedge against calamity, gained +4.6% on the month, while oil prices fell -15.6% on global demand concerns. A balanced portfolio, comprised of 60% in global equities and 40% in fixed income, would have managed a gain of +0.2% in January.
Amidst dramatic headlines and volatile markets, we look to our data-driven Three Dials methodology, which shows a relative calm in these seemingly chaotic times:
1. Market Sentiment and Momentum: Positive
Despite selloffs of varying degrees, the major global equity indexes have held firm above their long-term moving averages, a sign that an upward trending market remains intact. The MSCI Emerging Markets Index, which suffered the biggest losses in January, still shows a gain of +2.3% over the past three months. Investors seem confident that the coronavirus fallout will be well contained, which leaves our Sentiment Dial in a “Positive” position for the time being.
Global manufacturing reached a nine-month high in January, according to the JPMorgan Global Manufacturing PMI, a good sign in what was the weakest area of global growth in 2019. Meanwhile, the Atlanta Fed GDPNow estimates +2.9% growth for Q1 GDP, an increase from the +2.1% advance estimate of 2019 Q4 GDP. All things considered, strong economic datapoints result in a “Positive” reading out of our Fundamental Dial.
Valuation remains a concern, as global cyclically adjusted price-to-earnings ratios continue to creep toward historically high levels. Given the high prices for equities compared to the potential risks on the horizon, our Valuation Dial sits in a “Negative” position.
On balance, our Three Dials composite reading takes a “Cautiously Optimistic” stance through the first month of the year.
Sources:
https://www.alerian.com/wp-content/uploads/MLP-and-EI-Monthly-February-2020.pdf
https://www.markiteconomics.com/Public/Home/PressRelease/8484b7934c3a4cdaa0296c176c51b21d
https://www.bea.gov/data/gdp/gross-domestic-product
https://www.frbatlanta.org/cqer/research/gdpnow
https://www.starcapital.de/en/research/stock-market-valuation/