February 2020
Market Update

“Having come off of a blistering finish to 2019, no one is particularly surprised that we have seen some negative days and heightened volatility, but the cause for the uncertainty is probably not what anyone was expecting.”  

In the movie Dr. Doolittle, one of the more curious animals is a Push-Me Pull-Me, a lama-looking creature with two heads that has a hard time deciding which direction to go since one must go backward when the other is moving forward. That’s our stock market right now. 

Having come off of a blistering finish to 2019, no one is particularly surprised that we have seen some negative days and heightened volatility, but the cause for the uncertainty is probably not what anyone was expecting. 

To the positive we have had solid year-end earnings reports out of the companies with almost 68% of companies reporting results above analysts’ consensus estimates. We also have the Federal Reserve continuing to operate the money printing presses, having added $407 Billion to its balance sheet since September, a topic we have covered in prior commentaries as well as two Dave Talks. Just this week they announced they will extend their “Repo Operations” through the end of April. The consumer and the Federal Reserve are the Push side of the economy right now. 

Pulling in the opposite direction we first consider that the US stock market (S&P) rose 30% in 2019, a year when S&P earnings averaged 5%. In other words, they got expensive for no logical reason. Then we kicked off the year flirting with a potential situation with Iran, which has taken a back burner to the latest concern, the Coronavirus. 

In 2018, the common flu was responsible for 80,000 deaths in the United States. To date, the Coronavirus has claimed 259 lives. Obviously we are in the early innings of the game here with no idea what the true impact will be on lives until we have found our way to the other side of the problem. It is not so much the fact that this virus exists that is causing markets to wobble, it is the magnitude of the response from the world that has the potential to impact the global economy and thus stock markets. 

China has quarantined 50 Million residents in 17 cities. Wuhan, where the virus originated, is the most populous city in central China and a major hub in the country’s transportation network, which makes the threat of transmission – especially during Chinese New Year – that much greater. While the Chinese are being applauded for acting quickly to get the word out about the virus, the “cure” may be as painful as the disease as supply chains have been disrupted globally. US-based companies such as Starbucks and McDonalds have told workers to stay home. Apple has huge manufacturing concerns in the Hubei province, where Wuhan is located, and are busily working out alternative manufacturing sources. And we all know that the US has considerable trade with China, as does most of the world, so the prolonged restriction of travel and trade will undoubtedly impact corporate profits. See our graphic of the month for details. 

We have commented frequently on the slower pace of growth in the US since the Great Recession, with GDP growing between 2 – 3% over the decade. In the marathon known as the economy, if you are jogging, you can run a lot longer; when you are sprinting you cannot sustain that pace for a long time. The downside is when you are jogging, it doesn’t take as much to come to a full stop. For the present time, the coronavirus is creating the Pull on the economy, with more to come. 

Our bond models have removed our high yield bond position to short term cash and Rotation has added treasuries and investment grade corporate bonds in response to this week’s volatility. We remain cautious and vigilant in the near-term. Ultimately, we feel that the virus and all its consequences will run its course and the force of the printing machine that is the Federal Reserve will once again Push asset prices higher. As always, your questions are welcome if you feel at all concerned. 

With the Christmas decorations all packed away for another 9 months (some of us start early!) and the Phoenix Open about to wrap up a gorgeous run of weather, can spring training be too far behind? Well, no actually – in just four weeks the Cactus League crowds will be here and so, too, will our client appreciation events. We are hosting two games as usual – Diamondbacks vs the Giants at Talking Stick stadium in Scottsdale and Diamondbacks vs the Cubs at the Cubs stadium in Mesa. Be sure to get your reservations in now as tickets are limited! 

If you have questions, please contact us.
FINANCIAL PLANNING
COLLEGE AND TAX PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

To download the February 2020 Newsletter: CLICK HERE