Earnings continue to pour in leading to an increase in volatility, both on the up and downside. A large portion of the S&P reported this week which caused daily moves for individual stocks that are larger than normal. This is typical in the first quarter as full-year 2020 guidance is often offered. Predicting the next three months within an accurate range is difficult, let alone the next twelve. Analysts are hardly perfect with much less data to view. Numbers get adjusted while investors react. Most corporate leaders will set the bar low enough that they can expect to outperform throughout the rest of the year. There are too many variables that can change from here and one can be certain most of these estimates will be changed again.
Outside of earnings, the overall market has been whipsawed by the ongoing coronavirus threat. Over the past few days we have seen the number of cases explode. We are nearing 10,000 confirmed infected with over 200 deaths and another 15,000 suspected cases. These are small numbers today, but they have been rising by ~50% daily. These also pale in comparison to the common flu which is much more deadly, so far. The “death rate” is lower that SARS was, but at this point in time, the infection rate is well ahead of the pace for SARS and the Swine Flu. On the surface, agencies in and out of China have reacted quickly.
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From a corporate standpoint, we’ve seen 6,600 passengers on a cruise be sidelined due to a suspected case that was later confirmed to just be the regular flu. Travel to China is discouraged. They are encouraging people to work from home and avoid crowds. American Airline pilots are suing the company in order to cancel all flights to and from China. Germany’s Lufthansa has already cancelled their trips until February 9th. The economic landscape is going to be affected. China will see a negative hit to GDP. How much depends on the speed of this virus spreading. If current rates keep up, this will become a much bigger issue. If the rate of expansion eases, which is the base case today, this will be a blip on the radar.
The market opened down yesterday but saw a massive recovery once the World Health Organization came out with their statement on the disease. Although they finally declared the coronavirus a public health emergency, they didn’t recommend restrictions on the movement of people and goods. This helps alleviate the worst-case scenario that wreaked havoc on the market back when SARS was prevalent. This caused a relief rally, pushing the Dow Jones Industrial Average up nearly 400 points from its low.
There is plenty of debate around the market effects from here. Investors should take some caution at the moment until we get more data. There is no way to know the future trajectory of those infected or how many are actually involved, unless you trust China’s data. From a long-term standpoint, one is unlikely to even see the SARS effect on the markets in the historical charts. This is a short-term concern and all signs point to that staying the case. With valuations full at nearly 19x future earnings, any hiccup in the expected growth rate could cause a much needed correction. That could be a decent entry point for building positions in preferred names.
However, this has already helped cause a serious decline in interest rates and numerous commodities. Crude has gone from $65 to $53 in just a few weeks, albeit the $65 level was a short-lived spike from the Middle East tussle. Oil is still down over 13% this year alone. Copper and aluminum are down nearly 10%. The 10-year Treasury has moved from 1.90% to 1.56% over the past few weeks as well. Many parts of the yield curve are back to being inverted. Pockets of the market are pricing in a dire growth picture. A quick slowdown in the spread of the virus and a return to normalcy would go a long way to bring these markets back to normalcy, and vice versa.
The beat goes on for the high flying tech stocks. Amazon# reported a blowout quarter pushing the stock up nearly 10% after market and helping it join the $1 trillion market cap club. Apple# was the first to break this threshold in August of 2018 and has already tacked on another $420 billion in value. Alphabet# and Microsoft# are also members. The latter had stellar results as well. The cloud transition shows minimal signs of slowing down. Google reports next week.
Tesla# continues to pound short sellers with their metrics coming in much better than expected. Their market cap is above all car manufacturers other than Toyota. They have yet to turn an annual GAAP profit, but are on pace to do that this year and double EPS the following. These estimates are guaranteed to change.
Google’s only peer in online advertising, namely Facebook#, had a less than robust outlook with expenses rising and growth slowing. This is not a good combination for a growth stock. Time will tell if management is being overly cautious but the stock was down nearly 6%. After jumping 85% from December 2018, a pause makes sense here. They still produce positive earnings and are growing faster than the market with a fair valuation.
Fourth quarter Real GDP estimates were fractionally better than expected, coming in at 2.3%. This was led by housing, software capex and net exports. Q1 GDP should be lower with Boeing issues and the Wuhan virus. Low interest rates, an anticipated rebound in Capex and refilling inventories should bring GDP back up to the 2.3% range by year-end.
Today, actor/singer Justin Timberlake turns 39, baseball players Nolan Ryan is 73 and actress Minnie Driver turns 50.
James Vogt, 610-260-2214