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Coronavirus and the Markets

Mama said there'll be days like this
There'll be days like this, mama said

-The Shirelles

While I am not familiar with The Shirelles’ collection of music, I am familiar with this song. Today looks to be a very tough day in the market. Remember, there will be days like this, not just today, but many in the course of your investing journey. They happen. Good days happen too and last year was an example of many good days in stocks. Your investment strategy that we have built around your goals is prepared for days like this. That being said, they can be scary. We understand that so we are reaching out to inform you that we are watching developments with the coronavirus and evaluating how it impacts both short- and long-term strategy.

Each week TD Ameritrade Institutional Trading Services generates a Macros Monday. Below is an excerpt from this piece.

Recapping Last Week:

U.S. equity indices slipped 1-2% from record highs as fears mounted over coronavirus disrupting global supply chains and denting economic activity. Apple’s unexpected profit warning jolted investors’ sanguine outlook, and Friday’s U.S. Services PMI unexpectedly dropped from a 5-mo high in January to a 76-mo low in February, sending sizable risk-off tremors through global assets. Interestingly, the Eurozone Manufacturing PMI hit a 12-mo high, bucking the virus impact trend, albeit still slightly in contraction. U.S. bond yields fell across the curve with 10-yr and 30-yr below 1.50% and 1.90% respectively. The U.S. dollar’s rally came to an abrupt halt by the end of the week. Gold surged to a 7-yr high, testing $1,650/oz, yet despite risk-off, oil steadied above $53/barrel as threats of an OPEC production cut lingered. Ten of eleven S&P500 sectors fell, paced by technology and financials’ 1-2% drop. Semiconductors shed 3.3%, yet utilities finished the week sharply unchanged. The technology-utilities ratio has been a solid risk proxy, and its weakness over the last 2 weeks may have hinted at sub-surface issues. While U.S. PMIs spooked investors, morsels of positivity can be found. Business confidence in the services sector rose to the highest level since June 2019 despite an abysmal headline reading. Regional manufacturing indexes strengthened, and housing flexed its muscles with housing starts at the best notional level since 2006 and building permits near decade highs. Lower bond yields continue to benefit the consumer, but hints of inflation are starting to creep in as coronavirus affects global supply chains. U.S. PPI surged to +2.1% y/y with the core measure +1.7% y/y.

 Our Week Ahead:

A full docket of data lies ahead, but ultimately, coronavirus developments are in the driver’s seat for the market. Supply chain disruptions could cripple Q1 growth, and China’s government is doing all that it can to support the domestic economy. Last week we learned that Chinese banks extended a record $476bn in loans in January, nearly triple December’s level. Corporate loans surged nearly seven-fold. Tuesday’s U.S. Consumer Confidence is expected to rise, but whether the consumer fears coronavirus’ potential impact is yet to be seen. Wednesday’s housing data is likely to get a boost from the incessant decline in yields. That evening, Australian capex may move the needle on RBA rate cut odds, as the central bank weighs additional stimulus to counter negative knock-on effects from coronavirus. Thursday’s durable goods could be volatile considering the Boeing drama. To close out the week, U.S. PCE could jolt interest rates given its importance to Fed policy, while Chicago PMI offers yet another regional look at manufacturing. China’s manufacturing PMI reports Friday night, and while it’s likely to be hit badly, one might suspect a government massaging of the numbers to avoid market chaos (end excerpt).

In summary, we expect more volatility in the near term and are watching the spread of this virus. The market hasn’t seen a correction since the end of 2018. If this is a start of a correction, they typically are short lived, and last three to four months. In fact, there have been six since 2009.

Keep that in mind and stay the course.

Thank you for reading.