Investors have had to process a great deal of information over the last few weeks. The earnings season kicked off a few weeks ago and the number of companies reporting each week has increased rather rapidly with nearly a third of the S&P reporting during the past week. We’ve had economic news and central bank activity to digest, and of course, there has been all of the news about the coronavirus to process.
Let’s start with the coronavirus and its impact on the market. Obviously, this is a very serious virus with over 10,000 cases reported worldwide now and the death toll crossing the 200 person mark. I have read several articles about the virus’s impact on the global economy and they have ranged from, “the sky is falling” level to “it’s being blown out of proportion” level.
At this point, I don’t think either one of those extreme views is the best take on the impact. The World Health Organization felt concerned enough to call the virus a world health emergency, so I think it warrants a fair amount of attention. The economic impact is obvious as travel lockdowns could disrupt world trade, it will throw off the normal supply and demand relationships for things like oil and agricultural products.
One article I read said the coronavirus panic was an excuse for investors to bail on stocks and that investors shouldn’t really blame the virus for wild swings in the market. Well, that’s partially true. I have been cautioning readers that investors seemed to be getting a little exuberant about the market again and that the optimism was a concern. Just last week I wrote about certain comments made at the Davos Economic Forum and how they were signs of irrational thinking.
The coronavirus may have created the selling by causing investors to react in a negative way, but it seems like investors may have been searching for a reason to exercise caution. Every bull market must come to an end and we never really know what will cause them to come to an end. The coronavirus has caused this rally to stall, but I don’t think it will be the one thing that stops this rally.
Turning our attention to the earnings reports, it has been a pretty typical earnings season so far. There have been companies that have beaten estimates and companies that have missed estimates. From what I have seen so far, the percentage of companies in the S&P that have beaten estimates is around 67%. That is higher than the long-term average, but lower than the percentage for the last four quarters. The tech sector, in particular, has performed well with nearly 96% of its members beating estimates. The healthcare and utilities sectors have each had approximately 50% of companies beat estimates.
Finally, the advanced look at fourth-quarter GDP was released on Thursday. The report showed that the economy grew by 2.1% during the quarter and that was a little higher than the consensus estimate of 1.8% and it matched the third-quarter growth rate. The problem is that the report showed that business investment continued to fall. The reason the growth was able to maintain the same rate as the third quarter was due to government spending.
The market didn’t show much of a reaction to the GDP report when it was released. The market wasn’t open yet and the futures were already trading down due to coronavirus news. Once the market did open stocks dropped deeper into the red, but then turned higher in the afternoon and the three main indices rallied back to post gains.
This is an unusually busy period for news and that isn’t going to change in the week ahead. Look for news regarding the coronavirus to continue impacting the investment markets as more is learned. We also have the State of the Union Address in the week ahead and the January employment report will be released on Friday. If that wasn’t enough to keep you busy, the earnings reports will continue coming in at a fast pace.
My suggestion to investors is to be cautious and alert. There is no need to panic and make rash decisions. Hopefully, you had a plan for exiting any positions when you got into them in the first place. Stick to your plans.