Getting Beyond the Noise

The S&P 500 rose around 1.6% in a quiet week by recent standards. We’re sitting right at another all-time high despite what has seemed like a wild start to 2020. Coronavirus remains front and center, but China is gradually getting back to business. The disease continues to spread and while there is no question that it has had an impact on businesses, supply chains, and travel plans, it is a positive sign that parts of the country are returning to work. If China can get moving relatively soon, it would go a long way in shoring up confidence. Still, it’s important to keep in mind that we are heading into a historically weaker stretch of the calendar and that breadth has softened a bit despite the move higher in the index. There is plenty of positive data beyond the noise to support what we’ve seen out of equities, but it’s unlikely that we continue to post +1% advances every week. 

This week’s economic data releases continued to show a global economy picking up ever so slightly. This is at odds with everything we’ve heard about the virus and likely means that much of this data was collected before the spread accelerated and containment measures were put in place. Still, we’ve got some pretty good data coming out of the U.S. especially. Retail sales grew at 4.4% YoY, consumer sentiment rose and beat estimates, housing is accelerating, and most importantly, inflation is tame. This positioning should help insulate the U.S. from whatever weakness the Coronavirus might bring. Markets are running with the idea that stimulus will be there if and when necessary. China is already throwing monetary policy at the wall and persistently low inflation leaves the Fed in a position to do more on rates, should they have to. 

We’re also beginning to wrap up the Q4 earnings season with just over two thirds of companies now having reported. We’re still running at about 5% surprise on earnings which is translating to earnings growth around 1.3% for the quarter. Every sector aside from Real Estate is beating on earnings in aggregate. While some of these are, of course, sandbagged, there is evidence that companies weathered the worst of the trade war quite well. With the "phase one" deal now in place, it’s reasonable to expect that earnings might continue to trend higher this year. This is a good reminder that for all the anxiety we’ve felt over the trade war for the last several years, the companies have generally executed well. Executives get paid to navigate through difficult situations and they are successful more often than not. Coronavirus is likely no exception.

Preston May, CBE, Research Analyst