Market Volatility Returns on Heels of Virus Outbreak

As businesses around the world took actions to protect workers and limit the spread of the coronavirus, investors took note and drove stocks down as they took measure of potential impacts on global growth. While the U.S. consumer remains strong, data was a little softer in some other parts of the economy. The virus occurred just when investors were looking for rising global economic growth to support the run up in markets following trade war progress. This could push that growth recovery out a bit, but we don’t believe it will negate it. We still expect rising global growth this year.

In other words, we’re navigating a bit of uncertainty, which is why it’s important to have certainty in your long-term financial plan. While the past week saw a return to volatility, investors who stick to and trust their plan through choppy waters tend to be rewarded over the long term.

With that in mind, it was a busy week so let’s jump in.

WALL STREET WRAP

Coronavirus Concern Deepens: The coronavirus, known as 2019-nCoV, continued to drive volatility in markets as infection tallies grew and disrupted business activity around the world. The World Health Organization on Thursday declared the outbreak a public-health emergency of international concern, and as of Sunday night were more than 17,000 confirmed cases and more than 360 deaths (but also nearly 500 full recoveries), according to data from Johns Hopkins University.

Stocks fell through the week as investors worked to assess the potential impacts to global growth. Starbucks, for example, closed more than half of its 4,300 China-based locations. Major airlines suspended flights to and from China and a handful of international corporations from J.P. Morgan to Ford issued employee travel bans to the country. Royal Caribbean Cruises canceled three sailings set for February. Across the board, companies are expecting production and sales to temporarily slow while health officials work to contain the virus.

It’s unclear how long the outbreak might last, but a genetic analysis published Thursday indicates the 2019-nCoV resembles the SARS virus in genetic composition, and likely originated from bats as well. In 2002, the SARS virus spread to 8,000 people during a roughly six-month-long outbreak. However, it’s difficult to draw too many conclusions by comparing the two outbreaks.

A Comfortable Fed: Remember when the Federal Reserve policy meeting was big news? Perhaps you missed it this week, but the Fed kept interest rates steady Wednesday following its first policy meeting of 2020. All 10 members of the Fed’s rate-setting committee voted to hold fast. Fed Chairman Jerome Powell said he feels policy is in a good place but is determined to nudge inflation higher in order to give the central bank more flexibility during a future recession. If inflation continues to stay low could raise the odds of a rate cut in 2020.

Americans Are Also Comfortable: Americans’ optimism about the economy is at multi-decade highs, at least according to the Bloomberg Consumer Comfort Index. The index rose 1.3 points to 67.3 in January — a 20-year high — driven by optimism about personal finances and the overall spending climate. In other data, personal income rose by 0.2 percent month-over-month and personal consumption expenditures rose 0.3 percent in December, according to the Bureau of Labor Statistics. And a positive Bloomberg report was echoed by the University of Michigan’s Sentiment Index, which reached an 8-month high of 99.8.

A strong labor market and rising stock prices have helped fuel optimism about the economy for consumers, which could help maintain spending levels. Consumer strength will once again be a focal point in 2020, especially against a weak backdrop of corporate spending and manufacturing data. While a rebound in global growth was forecast for 2020, the coronavirus is putting a kink in global projections (though we believe that will be temporary).

A Few Softer Reports: The MNI Chicago Business Activity Index fell to 42.9, its lowest level in about four years (readings under 50 indicate contractionary conditions), with all five subcomponents weakening. However, similar regional PMIs from other parts of the country have been strong. The upcoming national ISM Manufacturing Index should offer a clearer view of this week.

Meanwhile, orders for non-defense capital goods dropped 0.9 percent last month (up 0.8 percent year-over-year), as demand for electrical equipment, metals and appliances fell. It’s the largest decrease since April. While trade tensions have eased, Boeing production suspension and now disruption from the virus continue to weigh on growth.

Overall, the economy grew 2.1 percent in the fourth quarter, closing the year at 2.3 percent. Growth was slower than the 2.9 percent posted in 2018, but the data still indicate an economy that’s growing at a slow, but steady pace.

A Quick Check in China: The Chinese Purchasing Manager’s Index fell to 50 in January, from 50.2 in December. While subcomponents showed signs of firming up. The non-manufacturing sector, for example, hit 54.1 and beat expectations of 53. Keep in mind, the data may not be all that helpful, given recent developments with the coronavirus and lumpiness from the Lunar New Year break.

Britain Bids E.U. Adieu (Sort Of): It was largely symbolic but at 11 p.m. on Friday, Britain officially cut ties with the EU after 47 years of membership and a more than three-year breakup. For now, the U.K. will continue to abide by EU law and pay into the budget, but the U.K. will have no representation at EU meetings. Now, an 11-month, phase-two, transition period will begin. Prime Minister Boris Johnson will negotiate the terms of his country’s future relationship with the EU to meet a Dec. 31 deadline. Official talks are set to begin in March.

THE WEEK AHEAD

Wages and Jobs: This week we’ll be digging through the first employment figures from 2020, and we’ll be looking to see how wages have grown for non-supervisory workers. Higher wages in this key segment of the workforce would indicate more broad-based wage growth and serve as a good sign that consumer strength is carrying over into the new year.

Manufacturing Data: We will get both the ISM Manufacturing Index and Non-Manufacturing Index in the coming week. The larger, services sector is expected to remain strong, and we will be poring through the numbers for signs of stabilization in the smaller manufacturing segment. While we've put trade tensions on the back burner for now, disruptions caused by the coronavirus and production stalling at Boeing could continue to be a nearer-term headwind to a manufacturing recovery.