Stocks suffered their worst week since 2008 as fears of a worldwide pandemic weighed on investor’s outlooks. Previous expectations were for modest growth and an increase in earnings in 2020. However, the lowering of 2020 earnings expectations by several major corporations and the virus’ spread in South Korea, Europe, the Middle East, California and Oregon brought the sobering realization that things likely will slow down. Stocks had seen price/earnings multiple expansion in 2019 culminating in indexes hitting all-time highs just the prior week. The prospect of earnings growth being delayed made the markets susceptible to a correction. A correction is defined as a 10% to 15% drop. The losses slowed on Friday following FED chairman Powel’s comments that the FED is prepared to act, if necessary, to keep the economy expanding.
While we may see the FED and other central banks act as soon as next month, the question is, what effect will cutting interest rates have in this environment? If people are afraid to travel, to eat at restaurants or socialize, can the FED’s actions really change that? If schools and work places close and supply chains are interrupted would cutting interest rates spur growth? A FED cut may produce a short term boost to stock prices, as the yields on bank deposits or treasury bills fall further, but to return to economic growth we need either a vaccine to prevent infection or an anti-viral drug to lessen the worst case infections.
Putting this weeks drop in the markets into perspective 10-15% corrections are a normal event in the markets, occurring on average about every 18 months. We had two in 2018. This too shall pass. Long term financial plans should remain valid.
Despite the markets’ drop, the week saw good economic data with a sharp uptick in business investment in January, following a decrease in tariffs with China. However, these economic numbers are all looking backwards. Traders tend to look forward.
Medium and long term treasuries fell to record lows this week as the 30-year Treasury ended at 1.679% and the 10-year Treasury yield ended at 1.156%. Crude oil plunged to $45.26 a barrel and natural gas fell to $1.701 MMBTUs. The U.S. dollar fell against a basket of currencies and gold prices fell to $1587.30 an ounce.
In economic numbers this week:
- The S&P CoreLogic Case-Shiller National Home Price Index in major metropolitan areas rose 3.8% for 2019 up from 3.5% year over year in November.
- The Commerce Department reported:
- The first revision of Q4 gross domestic product was unchanged at a 2.1% annual growth rate.
- Durable goods orders fell 0.2% in January. New orders for transportation equipment were down 2.2% Excluding the volatile transportation sector, durable goods orders rose 0.9%.
- Consumer spending rose 0.2% in January, down from a 0.4% increase in December.
- Personal incomes rose 0.6% in January due to gains in paychecks and the 2020 Social Security increase.
- Business investment rose 1.1% in January boosted by a rolling back of tariffs with China.
- The Labor Department Reported first time jobless claims in the prior week rose 8,000 to a seasonally adjusted 219,000. The four week moving average of claims rose to 209,750.
- The EIA weekly oil report is attached. Also, the EIA reported in the past week:
- Field production of crude oil was unchanged at 13.0MM barrels per day.
- Natural gas storage fell by 143BN cubic feet and is above the five year average at this time of year.
- Baker Hughes reported the number of active oil rigs fell to 678 and the number of active gas rigs was unchanged at 110.
- Factset reported with 95% of S&P 500 companies reporting Q4 earnings, the average earnings increase was up 0.9% from a year earlier.
Please call us if you have any questions or concerns.
Loren C. Rex, CFP®, AIF®, MA Erik A Smith AIF®
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
77 E. Michigan Ave, Suite 140
Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
Visit our Website: www.genfinplan.com
Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.
These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. The Indices mentioned are unmanaged and cannot be invested into directly.