After The Close
Stocks closed sharply lower on Friday as uncertainty over how much the China-based coronavirus would affect earnings and the economy weighed on sentiment.
Projections that China may only be operating at 50%-60% of its capacity indicate the potential for serious weakness in that nation’s GDP for the first quarter of 2020.
It is also unclear to what extent the illness will spread to economically important countries in Asia, such as South Korea and Japan.
Concerns over the depth of problems presented by the coronavirus and fairly full stock market valuations caused investors to take a cautious approach at the close of the week.
Some unsettling economic numbers not long after the opening bell caused further consternation when data firm IHS Markit reported that February PMI (Purchasing Managers Index) was the lowest since 2013. Weakness in travel and tourism appeared to be the cause.
The business news was not totally downbeat, though. Sales of existing homes in January were higher than expected. The housing market has been drawing strength from low mortgage rates, which appear set to fall further as bond yields trend down.
Significantly, the yield on the 30-year Treasury bond traded below 2.00% for the first time in history. The recent decline in bond yields suggests investors in that market are inclined to believe that a slowdown in the economy is at hand.
The rally in the bond market (prices go up when yields go down) did translate into relative strength for the interest-rate sensitive utilities sector, which fared better than growth-oriented segments.
Gold was another asset class that continued to shine, as investors looked for a safe haven during a poor session for stocks. Gold prices today reached their highest level in nearly seven years.
Despite the weak backdrop, the bulls managed to push the major indexes off their lows by early afternoon. There is a degree of conviction that the effects of the coronavirus will prove temporary, and that some of the business now being lost will be made up.
Among individual companies, shares of farm equipment maker Deere (DE) rose nicely after the company reported customers are cautiously optimistic that conditions will improve following the January “phase one” trade deal with China.
At the close, the Dow Jones Industrial Average was down 228 points; the NASDAQ was the biggest percentage loser of the major averages, tumbling 174 points; and the S&P 500 declined 35 points.
– Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned.
Before The Bell
The stock market opened modestly lower yesterday morning on continuing coronavirus fears, but quickly pared those deficits and moved onto a fairly even track even after a Federal Reserve official dampened hopes for another interest-rate cut in the months to come. Essentially, the official, Fed Vice Chair Robert Clarida opined that it was unlikely that there would be another rate reduction anytime soon. The consensus has been that there would be one more cut in 2020, following the three that were enacted late last year.
However, that rare sense of balance and equilibrium did not last very long, and as we moved further into the morning, the equity market started to tumble, with the Dow Jones Industrial Average briefly falling below 29,000 in a broad selling wave that took the blue chip composite down 388 points at the session's nadir in very short order. The drop was sudden and seemed to reflect growing fears that the coronavirus would slow the global economy, throwing some countries into recession.
The latest concern about the fast-spreading disease evolved after China's state-run Global Tines said that there had been a sharp rise in coronavirus cases. Financial and technology names suffered the most, with shares of Dow components Goldman Sachs (GS – Free Goldman Stock Report) and tech bellwether Intel (INTC – Free Intel Stock Report) heading the list of blue chip decliners at midday. However, as has been the case for much of this year, the selloff did not mushroom, and when we started to see some stability emerge, the stock market began to rebound.
To be sure, the disease has thus far been largely confined to China. But its impact will be felt globally including on our shores, as we are a big consumers of goods made in that country, and we also sell a lot to that nation. To date, coronavirus cases total 75,000 and deaths surpass 2,000. Meantime, after that sharp selloff ran its course and the market started to come back, the averages steadied themselves at lower levels into the late afternoon, with the Dow's deficit holding at about 140 points as we entered the final half hour.
Some minor additional buying then took over as we neared the close and when all of the data were in, the Dow would be off by 128 points; the S&P 500 would drop 13 points; and the NASDAQ would be lower by 66 points, with advancing and declining stocks somewhat in balance. As has been the case thus far in 2020, and especially so with earnings season in the rearview mirror, the market's focus has been on the coronavirus. Finally, in economic news, the Conference Board reported a 0.8% jump in January's leading economic indicators.
Looking out to the final session of the week, we will get data on sales of existing homes for January reported this morning. Expectations are that such activity will have eased somewhat in the latest month. Otherwise, the economic release calendar is light for the day ahead, and with earnings season just about over save for the retail group, the focus will be on the coronavirus. New stories on the spread of that disease will likely tell the tale of the tape today. For now, we expect a lower opening on Wall Street on growing coronavirus fears.
– Harvey S. Katz, CFA
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
