Historically, February is a bad month for investors. February 2020 was just bad. After a relatively tepid first half of the month global equities sold off hard in the final week as the Corona Virus spread out of China and across the globe. The fallout from the virus hit all the equity indices we follow along with the commodity index. Bonds, on the other hand, posted strong gains as investors sought out safe havens for their investments. The dollar was modestly stronger.
U.S. & International Stock Index Returns |
| Total Returns |
| Index February 2020 Year-to-Date |
| Dow Industrials (9.97%) (10.96%) |
| S&P 500 (8.40%) (8.56%) |
| S&P 400 (Midcap) (9.37%) (12.07%) |
| S&P 600 (Small Cap) (9.31%) (13.36%) |
| MSCI World (8.96%) (9.22%) |
| MSCI EAFE (9.04%) (11.16%) |
| Bloomberg Agg. Bond 3.76% |
| CRB Commodity Index (14.18%) |
| US Dollar Index 1.22% |
All data as of 03/01/2020, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Stock Market
February is historically one of the worst months for the stock market. Losses, especially after a strong January, are not uncommon, but what we sustained this year is unusual. All the major markets we follow were down substantially as the Coronavirus moved from a Chinese problem to a global issue. Frankly, we were skeptical about where equities were headed but we did not expect the selloff to be so strong.
Bond Market
Where does money flow when markets get spooked? U.S. Treasury bills and bonds. And when there are more buyers than sellers, bonds will get bid up in price due to the demand, pushing yields lower. The large demand for bonds in February allowed the Aggregate Bond Index to continue to be strong, gaining 1.84% for the month and 3.76% year-to-date.
As stated in our January Report, the strong gains we have witnessed in 2020 is a direct result of the fear surrounding the coronavirus outbreak, which has spread outside of China’s boarders to become a global phenomenon. Until such fears subside we expect the current trend of lower rates and higher bond prices to continue.
Please note: Prior to this being published, Federal Reserve Chairman Powell announced an emergency rate cut of ½%.
Currencies
The dollar uptrend is still intact even as US Dollar Index lost a modest (0.11%) in February. A convincing break below 97 for the index would force us to reevaluate our outlook for the dollar.
Commodities
The sizable January decrease in the CRB Commodities Index continued on in February as the index lost an additional 5.85%. Inside the index the oil complex led the losses as both oi and natural gas prices took a major hit from the global economic slowdown. What is notable now is that the breakdown is below the previous support levels (as notated in chart #4).
Gold, unlike the overall commodities complex, has continued to act as a safe haven for investors during unsure times. After a multiple-year base the yellow metal started its move higher in mid-2019 and, after a few months of consolidation continued higher. Up 5.21% for 2020 we expect to see this trend continue for the foreseeable future.
Looking Forward
The stock market rises like you are climbing a set of stairs but retreats like you are taking an escalator. Time and again we witness steady, boring increases followed by vicious sharp “corrections” of 10% or more. Some say this is just how markets work. Others say it’s the emotions of the market at play. To both we agree.
We enter the month of March right in the middle of a particularly sharp correction. Turn on the talking heads on CNBC or Fox Business and there’s almost always a reason why the downturn has occurred. Most all the time those reasons feel contrived. This time, however, the coronavirus excuse feels pretty legit.
In the short-term this does feel like a bit of an overreaction. After all, multiple days of one thousand-point swings in the Dow is not just unusual, but unprecedented. But if you peel back the onion a little further there are real points of concern for the future.
The viral outbreak has moved from China to become a global event. Travel is being restricted – some formally and some informally – as major events are being either put off or cancelled completely. In many areas of the world economic activity has been impaired. The United States has not been immune to any of this, nor should you expect it to be moving forward. Economically the effects are concerning.
Looking at the stock market, we will be watching the major indices to see how they react to the inevitable increase in the number of coronavirus cases both here and abroad. One of the tools we use is Fibonacci Trend Analysis when trying to assess where the market might be heading. Looking at Chart #6 (S&P 500) you can se that from the market bottom in December 2019 through the market high in April the S&P 500 has given back half those gains but corrections like this have been normal, albeit very quickly. From here we expect to even move towards the 61.8% retracement level of 2743 or some kind of short-term rally from these levels. Regardless of which one of these levels looks like a bottom, we would expect a rally than a retest of those levels. If the retest holds (read: if the index doesn’t substantially break below the test level), it is very likely the market can start to rebuild.
Beyond the emotions of the next few weeks or month we will be taking a look at the economic effects of the virus on corporation’s earnings. It has become clear that the first quarter’s earnings will be impacted but what will the impact be for the second quarter and beyond? According to Goldman Sachs portfolio strategist David Kostin, his earnings expectations for 2020 have dropped from 9% down to 0% growth for the year.
If Kostin is correct we would expect 2020 to be a hard year for stock market investors. That doesn’t mean we believe one should “get out” of the market or make a radical shift to one’s portfolio holdings. In fact, poor stock market performance should be seen as an opportunity for longer-term success.
For the younger investor who is saving for a retirement that is decades ways we believe it is in your best interest to keep purchasing in your 401k, IRA, ROTH, or traditional investment account. When you are many years or decades away from needing to use the money these short-term downturns are an opportunity to purchase shares at a reduced cost.
For someone who is close to or in retirement this can admittedly be scarier as you are either utilizing your portfolio to pay for living expenses or you are close to being at that point. If this is you, the best thing you can do is make sure your investment plan is in order, your asset allocation reflects your current needs, and that you have a portfolio designed to make sure you have the necessary cash available so you are not selling assets into poor markets to pay for current needs.
The sudden change in the markets has changed our current outlook from skeptical but positive to short-term bearish and skeptical for the intermediate term.
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Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com