for Week Ending January 24th, 2020
WEEKLY MARKET SUMMARY
Global Equities: Global equity markets were lower in weekly trading due to worries that an outbreak of coronavirus would weigh on economic activity. The virus, which originated in the Chinese city of Wuhan, has led to mass quarantines in China, and has migrated to the US, with three confirmed cases as of Friday afternoon. US markets were largely unaffected by the other major story, the commencement of impeachment proceedings against President Trump. The Dow Jones Industrial Average fell -1.20% and the S&P 500 closed out the week with a loss of -1.01%, while tech sector outperformance limited the Nasdaq’s losses to -0.79%. Developed Market International stocks, measured by the iShares MSCI EAFE ETF (EFA), slipped -1.26%, while Emerging Markets, measured by the iShares MSCI Emerging Market ETF (EEM) plunged -3.53%. The timing of the coronavirus outbreak could not be worse for Chinese markets, coinciding with the Lunar New Year celebrations, the country’s most economically important holiday.
Fixed Income: The concerns over a potential global epidemic triggered a flight to safety, bringing US government bond yields down to the bottom of their recent range. The US 10-Year Treasury Note yield declined to 1.69%, the lowest level since October. Corporate bonds also saw inflows, with Investment Grade funds picking up $4.186 billion and High Yield Bond funds adding $450 million during the weekly period ended January 22nd, according to Lipper data. High Yield Bond spreads bounced after hitting 3.38%, their lowest level since October 2018, ending the week back up around 3.6%.
Commodities: The coronavirus added to the recent bad news for oil markets, as crude sold off on the prospects of lower economic activity. Persistent oversupply has kept prices constrained, with US West Texas Intermediate slipping to its lowest finish since last November at $54.21. Natural Gas prices are also plumbing fresh lows as milder-than-usual weather has limited demand. Natural Gas futures ended the week under $2 per mmBTU for the first time since March of 2016. The crash in natural gas prices has led production from the lower 48 states to decline to its lowest level since September 2019.
WEEKLY ECONOMIC SUMMARY
Leading Indicators: The Conference Board Leading Economic Index (LEI), a measure of forward-looking economic trends, declined -0.3% in December, following a 0.1% gain in November. Economists anticipated a -0.2% decline, as the manufacturing sector continues to be a source of weakness. An uptick in jobless claims and a decline in building permits also contributed to LEI deterioration. Despite the decline, most economists agree that a 2020 recession remains unlikely. Consumers have carried the economy and more than offset the impact of the manufacturing slowdown, and jobless claims have trended lower since December as seasonal disruption fades from the data.
Economic Elites Convene at Davos: Delegates from 117 countries met at the 2020 annual World Economic Forum in Davos, Switzerland. The annual forum is a gathering of global politicians, bankers, and economists, among others. This year, climate change was front-and-center, with most of the participants labeling the issue as the most pressing, although US Treasury Secretary Steven Mnuchin provided vocal opposition to that view. While climate change has been discussed for many years, some companies are now starting to act to reduce fossil fuel exposure. Case-in-point, BlackRock, the world’s largest asset manager, recently pledged to divest its funds from coal companies by midyear.
2020 Earnings Update: Intel (INTC) set the stage for continued Technology sector outperformance, beating earnings estimates thanks to cloud-computing sales. Airlines were mixed, with Southwest (LUV) missing forecasts while American Airlines (AAL) and United Airlines (UAL) beat estimates. 2020 may prove to be a challenging year for the industry, however, with UAL forecasting zero earnings growth in the coming year. Finally, cable giant Comcast (CMCSA) was a mixed bag with strong results from its cable and internet business while the NBCUniversal media unit performed poorly. Next week brings earnings from heavy-hitters, such as Apple (AAPL), McDonalds (MCD), Facebook (FB), Visa (V), MasterCard (MA), Boeing (BA), and ExxonMobil (XOM), among others.
CHART OF THE WEEK
The Chart of the Week shows 3-month performance of West Texas Crude Oil (black line) and the SPDR Select Energy Sector ETF, XLE (blue line). Oil had been holding support around $55/barrel over the past 3 months and surged to start 2020 after a US drone strike raised tensions with Iran. An abundance of oversupply, however, has made any rallies short-lived, and oil is poised to again retest the $55/barrel mark, bringing XLE down with it. Hanlon’s Tactical equity sector rotation strategy recognized the weakness in energy in May of 2019 and has remained unexposed to the sector since that date.
Chart courtesy of StockCharts.com. Commentary, and opinions are those of Hanlon Investment Management.
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