Coronavirus vs. Markets

Investing Environment Review and Outlook – Volume 35

Coronavirus vs. Markets

The Coronavirus created fear and headlines, particularly when China issued and enforced travel bans on January 23rd. Although there have been numerous virus outbreaks historically, the 2003 SARS pandemic was most similar. Our analysis of that case showed no equity market impact from the time it first became news in the U.S. However, this year when China travel bans were followed by sharp declines in commodity prices, stock prices, and interest rates, it became a significant event with investment implications. For instance, our economic outlook indicators slipped from a high of 72 on January 10th to a neutral 50 on February 5th, cutting the odds of near-term economic acceleration that we expected in January. A slower world economy also means any Fed tightening is likely further out in time, a positive for equities. In response we made several rating changes this month, increasing our equity and long-term bond rankings, and cutting commodities.

U.S. Equities Rating +2 to Bullish 5

We raised our U.S. equity ranking to a bullish 5 this month. In January before the Coronavirus made headlines we took the equity ranking down to a neutral 3 due to the extreme sentiment readings and the concern of a 5-10% decline in U.S. stocks sometime in January or February. We did, in fact, see a slight correction January 24th which brought the S&P down 3.1% through January 30th. The decline was smaller than we anticipated, but it was enough to move equity sentiment back to neutral – in line with how previous extreme sentiment cases ended. It means that investors reduced their stock exposure, creating the ability to re-invest when conditions improve. Without the overheated sentiment, bullish Goldilocks conditions still dominate. Current conditions include moderate growth, a
loose Fed with quantitative easing, low inflation, and positive seasonality in Q1. In addition, if the Coronavirus slows the world economy as anticipated, the Fed will likely remain loose for longer, which should extend the economic cycle and equity bull market. The consolidation we saw in January was typical of January returns following big annual rallies like 2019. February and March, however, were strong, up 80% of the time an average of 4.1%. The biggest decline in those cases was just 1.2% in 1993.

Commodities Rating -1 to Neutral 3

We cut our commodities rating to a neutral 3 this month based on the drop in economic outlook indicators to neutral following the Coronavirus outbreak (chart 2). In addition, the dollar remains in a tight trading range. A significant move to the downside would be bullish, since commodities like crude oil are priced in dollars. The Coronavirus will likely cause an economic slowdown, particularly in China, but like a labor strike, snowstorm, or hurricane, pent up demand is expected to rebound quickly, along with the expected return for industrial commodities like crude oil and copper. In that case we will reassess our commodity position.

Long Term Bonds Rating +2 to Neutral 3

We raised our rating on long term bonds to a neutral 3 this month. Although prior virus outbreaks were not significant for markets, our economic outlook indicators declined to neutral after sharp declines in equity indices and industrial commodities like crude oil and copper. This meant at the very least our assumption of economic acceleration could be pushed off into the 2nd quarter. For instance, after copper has declined like this, bonds returned 8.5% vs. -3.9% when copper was rising (chart 3). If it proves to be a short-lived episode and economic outlook indicators rebound, it would increase the downside risk for long-term bonds and we would reconsider our bond position at that time. The neutral position gives us the flexibility to wait for clearer signals.

In summary, we raised equities to a bullish 5 rating because background conditions remain bullish for stocks after the recent 3% decline. We also raised long term-bonds and cut the commodities rating to a neutral 3 rating since the timing of any economic acceleration is now less certain. Thank you for your continued support and please contact your advisor with any questions.

IMPORTANT DISCLOSURES

This review and outlook report (this “Report”) is for informational, illustration and discussion purposes only and is not intended to be, nor should it be construed as, financial, legal, tax or investment advice, of Brenton Point Wealth Advisors LLC or any of its affiliates (“Brenton Point”). This Report does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing any recipient’s particular investment needs. Recipients should consider the information contained in this Report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.
This material is based upon information obtained from various sources that Brenton Point believes to be reliable, but Brenton Point makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.
This Report contains certain forward looking statements opinions, estimates, projections, assessments and other views (collectively “Statements”). These Statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward looking statements and projections. Brenton Point makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any financial instrument mentioned in this Report.
Any benchmark shown herein is shown for illustrative purposes only. No index benchmark is available for direct investment. It may not be possible to replicate the returns of any index, as the index may not include any trading commissions and costs or fees, may assume the reinvestment of income, and may have investment objectives, use trading strategies, or have other materials characteristics, such as credit exposure or volatility, that do not make it suitable for a particular person. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific financial instruments and to certain indices are for illustrative purposes only and provided for the purpose of making general market data available as a point of reference only; they are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested, as the value of investment can go down as well as up. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources.
Brenton Point accepts no liability for any loss (whether direct, indirect or consequential) occasioned to any person acting or refraining from action as a result of any material contained in or derived from this Report, except to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law.
This Report may provide addresses of, or contain hyperlinks to, Internet websites. Brenton Point has not reviewed the linked Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for your convenience and information, and the content of linked third party websites is not in any way incorporated herein. Recipients who choose to access such third-party websites or follow such hyperlinks do so at their own risk.
All marks referenced herein are the property of their respective owners. This Report is licensed for non-commercial use only, and may not be reproduced, distributed, forwarded, posted, published, transmitted, uploaded or otherwise made available to others for commercial purposes, including to individuals within an institution, without written authorization from Brenton Point.
Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2020

Sign up!

Sign up for our monthly newsletter and get the lastest news and research from our esteemed advisors here at Brenton point. Right into your inbox!