January Market Recap
February 3, 2020
Military conflicts and public health scares overshadowed the usual economic agenda in January. At month’s end, the stock market was still trying to make sense of the uncertainty caused by the Coronavirus outbreak in China, not to mention the variety of paths forward that could emerge in the wake of Donald Trump’s impeachment, Democratic primaries, and elevated tensions in the Middle East.
Start-to-finish performance in January was relatively benign. The S&P 500 and Dow both lost less than 1%, while the NASDAQ continued to outperform. But the day-to-day equity charts more closely resembled so many New Year’s resolutions at the local gym: A slow and steady climb for the first three weeks, followed by an abrupt fall-off that cancelled out all the hard-earned gains.
Six of the 11 equity sectors in the S&P 500 increased last month, though only three booked gains of 1% or more. Utilities (+6.7%) and Real Estate (+1.4%) were the beneficiaries of falling interest rates. Technology (+4.0%) got an added boost when the sector’s largest names delivered strong earnings.
Five equity sectors delivered losses in January, with Energy (-11.1%) and Materials (-6.2%) hit especially hard.
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It’s been long ago buried by an avalanche of news, but it was only four weeks ago that a US drone targeted and killed Iran General Qassem Soleimani, sparking a tense military conflict between the two countries. After a few days of national mourning, Iran responded by firing missiles at US-occupied military bases in Iraq, although that response resulted in no deaths.
On January 8, President Trump addressed the nation and suggested Iran was “standing down” from further military engagement, allowing equity markets to effectively shrug off the whole episode and almost immediately return to all-time highs. Later in January, three rockets were fired at the US Embassy compound in Baghdad, injuring one person. It’s a reminder that while a major conflict seems to have been avoided, tensions remain elevated.
On January 15, China’s chief trade negotiator and US officials put pen to paper in Washington, formalizing “Phase One” of their trade agreement. The deal, which had been agreed to in principle for three months, eliminated new US tariffs on Chinese goods but resulted in only limited rollbacks of tariffs already in place. By the end of January, China was already requesting added flexibility regarding some of its Phase One pledges as the country grapples with containing the Coronavirus amid a public health crisis.
That outbreak, which began in the city of Wuhan, has so far resulted in 362 reported deaths and more than 17,000 infections, according to China’s Health Commission. The death toll is already higher than that attributed to the SARS outbreak in 2002-03.
From an investment standpoint, health scares and pandemics have universally proven to be only temporary setbacks, but an outbreak that has yet to be contained certainly has the potential to affect investor sentiment and trigger a spike in volatility. We saw evidence of that late in January. The Dow fell 454 points on January 27 and another 603 points on January 31.
Roughly halfway through fourth-quarter earnings season, the scorecards for most S&P 500 companies have revealed better-than-expected numbers. About two-thirds of the reporting companies have beaten consensus estimates, and cumulative earnings are on pace to decline only 0.3% from a year earlier (compared to median forecasts of a 1.6% decline). With so many non-financial headlines dominating the news cycle, perhaps it’s no surprise that earnings beats and misses have both resulted in smaller-than-average price swings in their underlying stocks.
The Federal Reserve made no changes to the Fed Funds rate at its late January meeting. Consensus expectations call for the Fed to remain neutral with monetary policy for the first half of 2020. It was hardly a benign month for rate movements, however. Ten-year Treasury yields fell sharply in January, closing at 1.52% (compared to 1.92% at year-end). Yields are approaching all-time lows (1.34%) set in July 2016.
Emerging Market stocks and oil prices both sank in January as the spread of Coronavirus put a major dent in Chinese energy demand. After peaking above $63 per barrel on January 6, West Texas Intermediate Crude fell all the way to $51.56 per barrel at month’s end. WTI Crude last traded below $50 in December 2018. As a category, Emerging Markets fell 6.2% last month.
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