01.31.2020

After a hard 1.7% sell-off to close out the week, the S&P 500 is trading roughly 3% below its all-time high. The market has grown increasingly anxious with Coronavirus disrupting Chinese supply chains and impacting global travel. At the same time, a surge in Bernie Sanders’ polling numbers has the market considering the implications of his would-be presidency. While these events are certainly risks to the current economic outlook, it is important to remember that we are coming from relatively overbought conditions. The market impact of these worries may be exacerbated by participants looking for an excuse to take profits. Nonetheless, it wouldn’t be surprising to see the market continue to pull back from these levels. The best level of technical support we see is in the 3100 ballpark. That’s roughly 4.5% lower from today.

Coronavirus is doing its best to offset the benefits of the “Phase One” trade deal. In the back half of 2019, the market began pricing in a better outlook for global economic growth. The idea was that easing trade tensions would provide a boost to the Chinese economy and that greater clarity would restore business confidence around the world. The Chinese government has taken swift action to contain the spread of the virus, but the concern is that the containment measures themselves will further slow an already decelerating economy. With so much of the global economy dependent on the trajectory of China, its easy to see how the mood has soured. 

The manufacturing sector, in particular, was counting on a better story out of China to lead a turnaround. Over the last several months, we’ve steadily seen a deterioration in foreign and U.S. manufacturing. So far, this hasn’t slowed the overall economy much given the strength of the consumer. The U.S. posted a 4th quarter GDP print of 2.1%. This is slower than a year ago, but certainly much better than many had expected. However, the U.S. 10 year treasury has broken down to 1.52% and is on the verge of a new low. The 3/10 curve has re-inverted and the 2/10 is not far off. The bond market seems worried that manufacturing may begin to drag the entire economy down. Time will tell, but it’s a scenario that should be considered. 

To that end, the rise in market anxiety has coincided with a surge in Bernie Sanders’ polling numbers. Because of the lead he is building in Iowa and New Hampshire, it is increasingly likely that he could be the Democratic standard bearer. Taking the polls with a grain of salt, they also suggest that Sanders is favorable against Trump. Like him or not, his presidency would come with a dramatic change in policy vs. the current administration. The shape of congress will obviously play a roll in the equation, but executive powers are far more reaching than they used to be. The market has to discount the possibility of higher taxes, greater regulation, and bigger government, to a degree. 

We’ll be watching closely as these events play out and will be ready to shift our portfolios to align with our outlook.    

This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Past performance is not a guarantee of future results. The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation by Donaldson Capital Management, LLC.

S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.