Sometimes positive momentum at the end of the year continues on when the calendar changes. Other times it comes to a sudden halt. January 2020 saw strength in bonds continue on, commodities fall apart, and the dollar regain some strength while equities generally struggled.
U.S. & International Stock Index Returns
|Index January 2020 Year-to-Date|
|Dow Industrials (0.99%) (0.99%)|
|S&P 500 (0.16%) (0.16%)|
|S&P 400 (Midcap) (2.70%) (2.70%)|
|S&P 600 (Small Cap) (4.05%) (4.05%)|
|MSCI World (0.68%) (0.68%)|
|MSCI EAFE (2.12%) (2.12%)|
|Bloomberg Agg. Bond 1.92%|
|CRB Commodity Index (8.33%)|
|US Dollar Index 1.33%|
All data as of 02/01/2020, 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.]
After a very strong performance in 2019 the US and global stock market indexes we follow struggled to maintain the momentum. All six we track ended January in negative territory. Coming off a year where the S&P 500 was up almost 29% on weak corporate earnings, a less than jovial start to the year is not a surprise to us. Moreover, with the S&P500 breaking above the trendline in the 4th quarter of 2019 (Chart #1), we would not be surprised to see a test of that trendline in the coming months.
After a strong start to 2019 the bond market started to give back some of the gains as interest rates stopped falling. The 10-year Treasury Bond, for example, lost more than 1.2% from the start of the year to its low point in early September 2019. That rally in yields ended shortly after the calendar turned to 2020.
The strong 1.92% gain for the Bloomberg Barclays Aggregate Bond Index is mostly a result of fear surrounding the coronavirus in our opinion. Whenever there is a fear event money looking for a “safe” home will flee to the US bond market. We believe that the yield on the 10-year Treasury Bond is just testing the bottom of its long-term range, much like it did in 2012 and 2016. A breakdown below the 1.36-1.50 range would change our point of view.
The dollar continues to remain strong as the US Dollar gained 1.33% in January against an index of foreign currencies. This took the shape of a rebound after initial weakness in early-January that had us thinking a weaker dollar trend could be getting started. In early February it looks more like a fake-out breakout (chart #3) as the trend higher remains in place.
About that technical breakout we talked about in last month’s letter? Yeah, not so much. The CRB Commodities Index rolled over in January, posting a loss of 8.33% as commodity prices collapsed. Sometimes what’s happening in the world will change the supply/demand status quo enough to have a significant effect on pricing. That is EXACTLY what happened in January. The coronavirus outbreak in China led to lower purchase volumes of many commodities, and thus lower prices due to the abundance of available supply.
The one area that has been strong is gold and precious metals. After a multi-year basing pattern, gold looks to be breaking out to the upside (chart #5). We see no reason to believe this trend will not continue.
According to the January Effect, 2020 is not setting up to be a great year for the stock market. According to this theory money comes rolling back into the market at the start of the year as investors have cash on hand from tax loss selling and the such. These positive returns tend to lead to positive returns for the year. Likewise, a poor January is said to be a predictor of a negative year. Like just about anything related to the markets, this COULD be true … or not … really IT DEPENDS.
There are so many factors that play into how the stock market performs over time it is hard to make such predictions in any given year. Yes, positive markets in the first month has generally led to positive yearly returns. But the annual return for stocks is also positive about 75% of the time. It is what it is. If this is causation or just correlation seems to be irrelevant.
February, on the other hand, has traditionally been a hard month to make money in stocks. We could give you a reason for this but we honestly don’t have one. Again, it is what it is. Stock market returns are about earnings in the long term but emotions in the short term. We are not about to try and predict the overall market emotions beyond noting that February is a hard month for equity investors.
What we can say is that the earnings reports for S&P 500 companies over the past few weeks have been generally positive. This has been great for some individual companies but hasn’t had a positive impact on the market overall with the major indexes negative in January. And looking ahead to 2020 earnings we do have our concerns.
In 2019 the stock market had one of those years we all enjoy with the S&P 500 up almost 30% and every sector posting positive gains. In our opinion it was really, really hard to lose money in that type of environment. Those gains were a result of expanded valuations. Put another way, at the beginning of 2019 the market was paying 14x earnings to own the S&P 500. At the end of 2019 the market was now paying around 19x earnings. The earnings, notably, were only slightly higher than they were for 2018.
At the start of 2020 the consensus S&P 500 earnings estimates were calling for a 9% increase in 2020. Unfortunately we are starting to see downward revisions to the numbers already. We find it hard to believe that we can continue to see higher stock prices without earnings growth. We are not alone in this assessment.
For now we remain positive on the stock market, but we do so with a skeptical eye toward future earnings.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
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.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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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