We left off last month warning of pending volatility and that gains in 2020 will be “harder to come by.” Action in the last week of January is Exhibit A. News of a coronavirus outbreak sent markets down, wiping out year-to-date gains.
We’re faced with a mixed bag of factors to consider. Several support the markets, some are risks, and others are “to be determined.” As T. Rowe Price chief investment officer Justin Thomson said in Price’s Global Market Outlook piece, investor will need to be “comfortable with the uncomfortable” to take advantage of opportunities in 2020.
The Coronavirus is the bad news US stocks have been waiting for after a nearly straight line up since early October, 2019. History indicates the risks of a lasting effect are likely overstated. Compared to the SARS outbreak, at the time, retail sales in China declined and global markets swooned as the number of cases skyrocketed. But as the numbers leveled off, economic activity recovered quickly. Although some factors point to 2020 being worse than 2003, history has shown us that this kind of event is usually transitory.
Upcoming elections here in the US are certainly an ongoing risk. President Trump has been acquitted of impeachment charges and the Democrats are likely to nominate a left-of-center or far-left candidate. The scenario almost certainly will cause market nervousness as we approach November. We will also see continued gridlock, leaving a fiscal stimulus package for later this year improbable.
Business spending is still slow. Inventories took about 1.1% of GDP in the 4th Quarter. While investors should recover some in the 1st Quarter, the fuzzy long-term trade outlook with China is likely to constrain business investment.
The consumer continues to spend and remain confident. That can be seen in the substantial jump in the Conference Board’s Consumer Confidence Index, as investors clearly feel good about the current employment picture. Drilling down, consumers who thought jobs were “plentiful” increased from 46.5% to 49% and those that think they’re “hard to get” decreased from 13% to 11.6%. Also, retail sales for December increased for the third consecutive month and holiday sales were up strongly over a year ago.
The Fed and other central banks continue to be "accommodative". The Fed held interest rates steady for the second consecutive meeting on January 29th. There remains a high threshold to hike, and the next move is more likely a cut, but not in 2020. The Fed wants to get to 2% inflation, another impediment to higher rates. With the fed funds rate holding at 1.5%-1.75%, a flight to quality during the virus crisis has pushed markets rates lower. In this case, equities become more attractive on a relative basis.