Despite a rather volatile session yesterday, stocks ended basically flat but well off their intraday highs. That said, the Nasdaq 100 is up nearly 40% YoY and up nearly 120% over the past four years. While many are comparing today’s markets to those of the late 1990s, your authors included, the Nasdaq 100 rose over 600% in the 4-years leading up to the dotcom bust – a much wilder rise than this time around.
Turning to today, which sees the expanding coronavirus outbreak and response taking center stage, Asian equities finished the trading day lower, led by China’s Shanghai Index that fell 2.8%. Reports indicate that besides halting travel from Wuhan, the city where the new coronavirus first appeared, Chibi and Huanggang will be quarantined and Beijing announced that all public gatherings planned for next week will be canceled. At last count, the virus was responsible for the death of 17 people and has reportedly infected another 600 people. The travel ban, which looks to limit the expanse, comes before the Lunar New Year, the largest gift-giving holiday, and will in all likelihood crimp related spending. Later today the World Health Organization will decide on Thursday whether to declare the outbreak a global health emergency, which would step up the international response.
The major US equity indices all closed in the red yesterday on the news that the Center for Disease Control identified the first case of coronavirus in the US – a traveler from China was diagnosed in Seattle. Shares of Wynn Resorts (WYNN) and Las Vegas Sands (LVS) lost 6.2% and 5.3% respectively on concerns that the increasingly global outbreak could negatively impact international travel. Following reports China has taken steps to contain the coronavirus, Asian equities finished the trading day higher. At the same time, however, Chinese officials announced that more than 400 cases of the new coronavirus have now been identified with the death toll hitting nine, and the virus is “adapting and mutating.” We suspect we have not heard the last of this and we expect investors will closely monitor coronavirus developments to be had and assess implications for airline, gaming, hotel, and other travel-related companies. The World Health Organization is expected to issue a formal statement on the matter later today.
The US Senate will hear opening arguments in President Donald Trump’s impeachment trial today, followed by several days of presentations. So far the market has been completely disinterested as President Trump makes the rounds at the World Economic Forum in Davos. In interviews this morning, President Trump shared trade talks with the EU have begun and he would be “very surprised” if he had to implement auto tariffs; he expects to announce a “middle-class tax cut” over the next 90 days but acknowledges Republicans will need to win back the House in 2020 to pass that initiative, and his administration is developing a healthcare plan.
Coming off the Martin Luther King holiday for which the US markets were closed yesterday, shares in Hong Kong led losses in Asia after Moody’s cut its rating for the city from Aa2 to Aa3 on Monday; there are also concerns over a new strain of coronavirus in China just as Lunar New Year holiday travel heats up. As we write today’s Daily Markets note, nearly 300 people have been diagnosed globally, with the vast majority in China, and the death toll in China has climbed to six. The World Health Organization will meet tomorrow to discuss whether to declare the outbreak an international public health emergency. Those concerns have rippled across global markets with European equities trading off and US equity futures pointing to a lower open.
Thanks to the MLK holiday, we have a shortened trading week ahead, but that doesn’t mean there’s any less going on over the next four days. Between impeachment, the World Economic Forum (WEF), upcoming Brexit and economic data and earnings season, investors are likely to have their hands full. Speaking at the WEF today, President Trump commented phase two China trade talks with begin shortly and tariffs will remain in place during those negotiations. Also at the WEF, US Treasury Secretary Steven Mnuchin said the Trump administration would propose a new middle-class tax cut later this year.
Many of the major US equity indices hit new all-time highs again yesterday, pretty standard at this point in 2020. After just 11 trading days in the new year, the S&P 500has already hit five all-time highs and yesterday moved past the 3,300 level for the first time, which has the index once again flirting with overbought status from a technical perspective. Small caps finally joined the party yesterday. The Russell 2000 has underperformed the other major indices by a significant margin over the past year, the Nasdaq 100 by over 50% and the S&P 500 by over 35%, but yesterday reached a new 52-week high, but still not a new all-time high.
After 2019’s impressive run, most analysts were in a more conservative mood when it came to 2020 forecasts. Edward Yardeni, the most bullish of Barron’s 2020 outlook panel, targeted 3,500 for year-end. That’s just 5% upside over the next 11.5 months after yesterday’s close. We continue to see the current earnings season, which will heat up considerably over the next few weeks, and the aggregated guidance to be had for the current quarter as one of the key determinants of the stock market’s next move. The rash of 2020 economic outlooks and the potential implications for monetary policy in the coming year at the annual World Economic Forum in Davos, Switzerland shared next week are likely stock market shapers as well.
One day after the US and China inked their phase one trade agreement, Asian equity indices finished on a mixed note, and European equities are also mixed while US equity futures point to a positive open as investors dig into and attempt to digest the eight-part, 96-page agreement. The long and short of it is there are several positives to be had including China committing to $200 billion in additional purchases of U.S. goods, “enhanced” intellectual property protections, and enforcement mechanisms.
However, the agreement has left in place U.S. tariffs on about $370 billion in Chinese goods with possible reductions subject to forthcoming negotiations that will are expected to tackle Chinese subsidies to domestic companies and Beijing’s oversight of Chinese state-owned firms. The next round of trade deal negotiations was expected to begin immediately per comments from President Trump, but China has yet to confirm that timing, which alongside lingering intellectual property concerns, is likely leaving some thinking the agreement is a half-step measure. Over the coming days, we expect more analysis to be had as well as follow up comments, which should offer more clarity to investors on the puts and takes of the agreement.
Today is the day many have been waiting for as China and the US are expected to officially ink their phase one trade deal later this morning. In a potential “buy the rumor, sell the news moment,” Asian equities finished the day lower, and European equity indices are currently mixed, but little changed as are US equity futures. Weighing on the market’s trade deal mood are recent comments that existing tariffs on “billions of dollars” of Chinese goods coming into the US are likely to remain in place until after the US presidential election and the completion of the phase two agreement. Moreover, it’s being reported US and China have “an understanding” that no sooner than 10 months after the signing of the agreement, the US will “review progress and potentially consider additional cuts on tariffs affecting $360 billion of imports from China.”
To some this likely raises some questions over the scale and scope of the phase one agreement, the full text of which is expected to be released…
Today kicks off December quarter earnings season with earnings for the S&P 500 expected to have declined by 2% in the December quarter according to FactSet. If earnings do in fact contract during the December quarter, it will be the fourth consecutive quarter of year-over-year net income declines for the S&P 500. Despite this, the index managed to make yet another new high as investors begin to focus on EPS growth prospects for the coming year; per FactSet the S&P 500 group of companies are expected to grow their collective EPS by 9.5% growth YoY in 2020. That rebound is expected to be led by the 4.7% YoY growth in earnings for the S&P 500 in the current quarter and strengthen throughout the year.
We’d note the S&P 500 is trading at a P/E ratio of…
Last Friday stocks gave back all their earlier gains to leave the major US equity indices lower on the day. The major indices took a hit on Friday in response to the December Employment Report from the Bureau of Labor Statistics that showed nonfarm payrolls rose just 145k in December, well below expectations for 160k with an additional 14k downward revision to the prior two months. Aside from the miss relative to expectations, what we find even more concerning is the retail sector reportedly added 41k new employees for the holiday season, which disappointed outside of online sales. We’ll be looking closely for such a reversal in that category inside the January Employment Report.
For the first full week of trading in 2020, the Nasdaq 100 gained 2%, followed by the Nasdaq Composite’s gain of 1.8% and the S&P 500’s 1% move. Although the major equity indices all closed in the red last Friday, the Dow Jones Industrial Average managed to briefly make a new intraday high, breaking through 29,000. If the Dow can manage to hold that level today, it will be the third new thousand-level mark since the start of 2019.
From an economic data and earnings report perspective, today is poised to be a quiet one, however, …
The S&P 500 set a new intraday high and the Nasdaq Composite Index closed at a record high yesterday as investors breathed a sigh of relief and unclenched following President Trump’s statement that he would tighten sanctions on Iran – which would remain in place “until Iran changes its behavior” — rather than use military force. The de-escalation rally that ensued saw nine of the 11 S&P 500 sectors move higher yesterday, was followed across the globe with Asian equities closing the day higher. Lending a helping hand to the market’s mood today was China’s confirmation Vice Premier Liu He will sign a “Phase 1” deal next week in Washington.
European markets are trading higher across the board, shrugging off renewed timing concerns over the UK’s exiting the European Union. While Boris Johnson’s position is the U.K. won’t extend its transition period beyond 2020, and that he wants a Canada-style trade accord (under which 98% of goods traded are free of tariffs), European Commission President Ursula von der Leyen has said it is “basically impossible” to negotiate all aspects of its future relationship with the EU by the end of 2020. Did anyone really expect drama around Brexit to not follow us into 2020?
Despite mixed retail comp sales reports being had this morning…
Yesterday stocks tried to shake off the stress of the rising conflict between the US-Iran, but all the majority equity indices closed in the red. Early this morning US stock market futures dropped on the news that more than a dozen ballistic missiles were launched from Iran at two military bases in Iraq that host US military and coalition personnel. While Asian equities closed in the red today, European equities and US equity futures rebounded from their lows as more information came in surrounding the Iranian missile launch, including reports of no causalities, and Iranian Foreign Minister Mohamad Javad Zarif tweeting, “We do not seek escalation or war, but will defend ourselves against any aggression.”
This morning also saw yet another tragedy as 167 passengers and all nine crew members onboard Ukrainian International Airlines flight 752 out of Tehran were killed when the plane crashed within minutes of take-off. The Boeing 737-800 was headed to Kyiv shortly after 6 am local time. Iran’s press immediately reported that the plane crashed due to mechanical problems, but no further details were given. Video on Twitter (TWTR) showed the plane in flames as it fell to earth.
The Ukrainian Embassy in Iran quickly issued a statement citing engine failure based on preliminary information, then later removed the statement and said, “any statements regarding the causes of the accident prior to the decision of the commission are not official.” Boeing (BA) issued a statement, “We are aware of the media reports out of Iran and we are gathering more information.” No doubt many will speculate on the improbable coincidence that a plane flying out of Iran, which just so happens to be lobbing missiles at Iraq at the time, crashes minutes after takeoff followed by nearly immediate claims of technical failure. For what it’s worth, this crash occurred just after US aviation regulators issued new restrictions barring civilian flights over Iraq and Iran.