Market Commentary for the week ending March 7th, 2020
- U.S. large stocks closed the week higher while other markets added to their year's losses
- The yield on 10-Year U.S. Treasuries fell to an all-time record low
- The employment report showed the economy adding far more jobs than expected
Market Performance Summary
Notable Market Headlines
Fear and greed ran rampant throughout the markets this week with markets soaring one day and collapsing the next. On Monday the Dow Jones Industrials recorded their biggest one-day point gain in history gaining +1,294 points. This though followed the biggest one-day point drop in history the week before as discussed in last week’s blog. The following graph shows the range of the Dow’s move day-by-day averaging just over 1,000 points a day.
All of this volatility of course is the result of the ongoing spread and tremendous uncertainty about the coronavirus. Many economists now expect the world economy to be negatively impacted by the virus. In an effort to get in front of the economic slowdown, the Federal Reserve lowered interest rates by -0.5%. This was widely expected but did little to calm the markets as some experts argue that this financial stimulus is not what is needed given that today’s concerns are not the result of a financial-driven crisis.
When it was all said and done, large U.S. stocks closed higher for the week up +0.6% as measured by the S&P 500. The Dow Industrials did better gaining +1.8% while the NASDAQ lagged behind higher by just +0.1%. These gains were not necessarily representative of the entire market with various sectors experiencing very significant moves such as energy stocks down -6.1% while utilities surged +7.9%. Furthermore, small U.S. stocks declined by -1.3% as would generally be expected as they tend to not be as financially stable as larger companies and could suffer more in an economic slowdown.
International stocks did not fare as well as U.S. stocks with developed markets down -0.8% and emerging markets lower by -1.0%. Again, these relatively modest declines do not tell the entire story as the markets in some countries were off much more. Italy, where the Coronavirus is currently taking its biggest toll in Europe, was down -3.6%. Among the emerging markets, Brazil and Russia, both countries that rely on the export of oil for revenue, were two of the biggest losers down -8.5% and -5.7% respectively fueled by a sharp drop in the price of oil.
Investors rushed into assets considered to be safe havens during volatile times pushing the price of gold and bonds both sharply higher. Gold surged +6.1% for the week while bonds rallied +1.6%, a relatively big move for bonds. Year-to-date these are the only two asset classes higher with gold up +10.2% and bonds have gained +5.3%.
Bonds, often considered by many investors to be relatively uneventful, are experiencing some big moves. The biggest of these moves is the drop in yield on the 10-Year U.S. Treasury Bond to an all-time historic low of 0.767%. The Fed lowering interest rates combined with aggressive buying by investors who are presumably selling stocks and expectations of a slowing economy are all contributing to this low yield. Another notable headline in the bond market is the cost of insuring losses on corporate bonds has jumped suggesting investors fear problems in the future.
Among the other couple alternatives, the story was mixed. Real estate stocks posted a strong gain of +2.7% helped by falling bond yields making their high dividend yields more attractive. On the other hand, commodities fell -4.0% directly the result of one of the biggest downward moves in the price of oil in recent years following news that Saudi Arabia was unable to get Russia to cut production.
Many of the big moves in individual stocks this week were connected to the coronavirus and investors betting on potential winners and losers. One group of winners include food manufacturers such as Campbell Soup (CPB) and General Mills (GIS), up +14.7% and +11.8% respectively, as well grocery store Kroger (KR) gaining +13.9%. These companies are all benefiting from consumers stocking up on various supplies in anticipation of possibly needing to stay at home for an extended period of time.
Citrix Systems (CTXS), a company providing tools and software allowing people to work more remotely, rallied +14.4% for the week and is up +6.3% for the year. The stock though is off its January high reached after reporting better than expected earnings and getting upgrades from multiple Wall Street analysis.
Healthcare stocks were among the best performing sectors but not necessarily driven by the coronavirus. This week’s strength followed Joe Biden’s success on Super Tuesday over competitor Bernie Sanders for the Democratic nomination. Sanders has targeted some in the healthcare industry as greedy creating concerns of more regulation that could reduce profits for these companies. Some of the biggest winners are included in the below table.
The notable losers for the week are all many of the expected suspects such as cruise lines, airlines, and casinos. These industries have been hit very hard in the market as illustrated in the below graph showing the year-to-date performance of the three largest cruise lines all down about -50%.
No question the cruise industry is and will continue to be meaningfully impacted by the coronavirus and many of the headlines and stories are terribly negative. Investors in these stocks though need to decide how long the impact will last. It is generally believed that this industry will continue to see significant long-term growth given the aging population and the popularity of cruises. I’m not a stock-picker but this group is going to be interesting to watch as this story unfolds.
Energy stocks were hit for a second week in a row as the price of oil plummeted this week. As previously noted Russia and the Saudis could not agree on a production cut that sent the price tumbling. Many stocks in the sector are down -30% to -50% for the year.
Economic Indicator - Reported
The February employment report was the big economic news of the week with job gains of 273,000 which far exceeded economists’ forecast of only 165,000. In addition to the strong February, the two prior months’ reports were revised higher by a cumulative 87,000 jobs all indicating the economy was very strong going into 2020.
Unfortunately this good news was discounted by investors as the data was gather prior to the heightened concerns in the U.S. about the coronavirus. There is a lot of debate about whether or not companies will let works go if economic conditions weaken or will they hold onto employees instead expecting a rapid recovery once the virus is contained.
The manufacturing sector did show some weakness it two other reports with factory orders down -0.5% in January and the ISM Manufacturing Index came in at 50.1% still showing the smallest level of expansion. The ability for manufacturers to get parts due to the coronavirus is impairing production. Both reports were below economists’ forecasts.
Economic Indicators – Upcoming
The following economic data are expected in the coming week:
- Consumer Price Index (CPI)
- Producer Price Index (PPI)
- Small Business Index
- Consumer Sentiment Index