Rally Pausing

Markets went on sick leave late in the week with the spread of the Coronavirus causing a bout of market angst. The S&P 500 fell just over 1.6% from last Friday’s record high. With participants trying to assess the potential economic impact of the virus and sentiment stretched, it seems like a natural conclusion that markets would take the opportunity to lock in profits. Still, it’s a bit early to call the Coronavirus an epidemic and a look past viral outbreaks reveals that they have most often had little influence on the market over the long-run. However, a number of key charts for the macro call have notably turned down over the last week. U.S. 10 year yields, copper, and oil have all moved lower. With global economic data still on the upswing, the pause in these market indicators are likely more indicative of a cyclical rally that is tired.

Beyond the Coronavirus, it was a fairly quiet week by recent standards. The impeachment trial is playing out in the background, Democrats are jockeying for position ahead of Iowa in a low key way, and geopolitical tension appears to have cooled for the moment. This relative calm has allowed the market to turn its attention towards earnings. The initial reports have generally been beating to the upside, but with few exceptions, companies haven’t been overly rewarded. With the recent advance and P/Es heightened for many companies, earnings reports must be immaculate to garner a big push from the market. Comcast (CMCSA) is a good example of a company that was punished after a reasonably good report that saw earnings growth just shy of 10%. Rather than focus on the impressive growth of broadband customers, the market picked out the greater than expected losses on the video side and the investment that will be required to boost performance. Don’t expect many companies to get a pass for anything less than perfection this quarter.

Markets will have the weekend to digest the spread of the Coronavirus and there are key earnings reports to come in the week ahead. It’s possible that this is the start of the pullback we’ve been anticipating. If that’s the case, we’ll continue to take resolve in our positive longer-term outlook driven by easy monetary policy, easing trade tensions, and slowly improving global growth. We should be ready to take advantage of the opportunities that present themselves.