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Strong Economic & Earnings Data Supplant Coronavirus Fears

February 10, 2020
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Monday Morning QB - Market Observations:

  • Job Growth Continues to Create Optimism
  • Americans Continue to Enter the Workforce
  • Earnings Growth Continues to Top Estimates
  • Coronavirus Headlines Remain as Death Toll Continues to Rise
  • Chinese Government Adds Stimulus to Help Economy
  • Stocks Rally by More Than 3% on the Week – Regain Positive Territory for the Year

Monday Morning QB - Market Performance

U.S. stocks recorded solid gains for the week. Thanks to encouraging economic data coupled with better than expected earnings reports- at least for now- the global economy remains resilient in the face of the coronavirus outbreak.

The large cap benchmarks and the technology-heavy NASDAQ Composite gained the most, establishing new record highs, while smaller cap indexes also finished to the upside.

The Dow Jones Industrial Average rallied 846 points to finish the week at 29,102, a gain of 3.0%. The NASDAQ Composite surged over 4.0%, while the large cap S&P 500 index rose 3.2%. The S&P 400 mid cap index and small cap Russell 2000 rose 2.1% and 2.7%, respectively.

Company Earnings are Solid

Before giving back a fraction of last week's gains on Friday, the stock market recorded another solid week of growth. The stock market is positive again in 2020 wiping out the losses suffered between January 17-31 when the coronavirus took over the news cycle.

With the earnings results for more than half of the companies on the S&P 500 already reported, 71% of the companies have reported higher than expected earnings.

When comparing the current cycle to the past five years, the number of companies beating estimates is in line with the five-year average. A breakdown of the numbers shows the technology sector on pace to have the highest percentage of companies beating their estimates. It’s no wonder why the technology sector has been such a strong performer since October.

Coronavirus Fears are Part of Corporate Discussions

A topic of conversation on many of the company earnings calls is the negative potential effect of the coronavirus. How large is the negative effect, and for how long will the effect of the virus linger in corporate earnings reports?

Without an answer to the virus-related questions, the result for now is to punish the current solid earnings reports.

Let me explain.

Typically in a rising stock market, a company whose earnings exceed expectations gets rewarded with increases in their stock price. According to FactSet, companies on the S&P 500 who have outperformed earnings expectations have seen a share price increase of only 0.7%. The five-year average price increases due to better than expected earnings results is 1%.

This may seem like small potatoes, but potential future profits exist from this price anomaly.

Companies that were under-rewarded from solid earnings due to the coronavirus will potentially see the biggest price gains if the virus is contained and dealt with quickly over the next weeks and months ahead.

Time to make a list of stocks to watch.

A viable strategy is to buy companies with strong earnings reports on down market days related to coronavirus headlines.

Solid Economic Data Shows Our Economy Keeps Humming Along

The Bureau of Labor Statistics’ Non-Farm Payrolls (NFP) report for January produced a blowout number.

The U.S. added 225,000 new jobs in January. Companies continue to expand the workforce! Over the past three months, the economy has added an average of 211,000 new jobs—a marked acceleration from last fall and summer.

The unemployment rate, meanwhile, ticked up to 3.6% from a 50-year low of 3.5%, but the increase was for the best of reasons- 574,000 additional workers entered the labor force.

A tight labor market has put more upward pressure on wages, though paychecks are still not growing as fast as they usually do when unemployment is so low. The reason again is that amazingly more and more Americans continue to enter the workforce.

Wages should increase at a faster rate once the slack in the workforce dries up.

The increase in worker pay over the past 12 months rose slightly to 3.1%, but it sits below the post-recession peak of 3.5%. As long as people want to work and companies keep hiring, wage growth increases will be below expected percentages.

The amount of slack in the labor force (people not counted in the unemployment number that are now finding work) continues to baffle the experts. The result is a lot more Americans working and spending money on goods and services, keeping our economy humming, and the U.S. stock market rising.

The Institute for Supply Management (ISM) reported its survey of the services side of the economy increased to a 5-month high in January. This group makes up more than 70% of the U.S. economy.

ISM reported its non-manufacturing index increased 0.6 point to 55.5. Economists had expected a reading of 55.0. The biggest increase came from a 3.9 point jump in the business activity index to 60.9—its highest level in nearly a year.

Readings over 50 are viewed as positive for the economy, while anything over 55 is considered exceptional.

One potential relevant factor from the report is some of the survey responses may have occurred before the coronavirus outbreak.

Chinese Government takes Steps to Help Economy Deal with Coronavirus Impact

China is tapping all available monetary and fiscal tools to lessen the impact of the coronavirus on their economy.

China has already injected 1.7 trillion yuan of liquidity into financial markets in the two days after its stock market reopened following the Lunar New Year.

Furthermore, a deputy governor at the People’s Bank of China signaled that the loan prime rate will see a reduction at the next announcement on February 20th.

The government has also set up a 300-billion-yuan credit facility for producers of masks and other designated items, enabling them to borrow money at a subsidized effective rate of 1.6% or less.

The biggest threat to the global economy is the ultimate impacts of the coronavirus, and it is way to early to determine what that might be.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.wantchinatimes.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)