February 11, 2020

Monthly Market Summary – January 2020

Global finanical markets started the year off with optimism.  Equity markets continued the fourth quarter 2019 rally and marched higher during the first part of January.  The positive sentiment was due to China lowering bank reserve requirements to support economic growth, the signing of the phase one trade deal between the U.S. and China, strong earnings reports, and improving economic data.  Despite a brief pullback in reaction to a military flare-up between the U.S. and Iran, U.S. equity markets rose to new record highs.  The S&P 500 index set six new record highs, the Dow Jones Industrial Average had five, and the technology company heavy Nasdaq also reached new highs.  The price of crude oil rose as high as $64 on the improved economic growth outlook.  Things changed quickly.  In the second half of the month, fears about the impact of the coronavirus outbreak overshadowed earnings and economic data.  Fears about the spread of the virus and the resulting travel bans and business closures refueled concerns about slowing global economic growth.  Global stocks plunged wiping out previous year-to-date gains.  Not surprisingly, the emerging markets stock index underperformed the U.S. and developed international stock indices due to higher exposure to the impact of the virus in China.  Crude oil prices plunged also.  The price of West Texas Intermediate (WTI) crude oil dropped 19% from the high during the month and almost entered bear market territory (more than a 20% drop from a recent high).  Safe haven asset prices rose.  Gold rose about 5%.  U.S. Treasury bond yields declined as prices rose on strong demand.  The benchmark 10-year Treasury bond yield dropped to 1.51% by month-end compared to 1.92% at the end of December.  The U.S. Treasury bond yield curve inverted again with the 3-month Treasury bill yield higher than the 10-year yield.

Economic data was mixed during the month but showed improvement in certain key areas.  For example, U.S. new home start data surprised to the upside with starts increasing 17% in December over November and starts 41% higher than a year ago.  China reported better than expected industrial production, retail sales, and fixed asset investment in December.  The manufacturing index for the eurozone increased to 46.3.  The U.S. Institute for Supply Management manufacturing index declined to 47.2, the lowest reading in a decade.  However, the non-manufacturing index rose more than expected to 55.0.   U.S. real gross domestic product (GDP) growth was 2.1% for the fourth quarter and 2.3% for the calendar year 2019.  In comparison, euro area GDP growth slowed to 0.1% in the fourth quarter.

Corporate earnings season began with strong earnings reported by money center banks and other financial services companies as well as for several big technology companies, such as Apple and Microsoft.  Even consumer staples company Proctor & Gamble reported better than expected earnings.  Over 60% of the S&P 500 companies that have reported earnings have beat analysts’ estimates.  Certain companies did report disappointing earnings such as Facebook, 3M, Pfizer, Chevron, and ExxonMobil.

Returns for major U.S. equity market indices were negative in January.  The S&P 500 index outperformed the Russell MidCap index and both outperformed the Russell 2000 index of small-capitalization (cap) stocks.  Growth stocks outperformed value in each market cap segment largely due to strong gains for the technology sector and weakness in the energy and materials sectors.  The utilities sector was the top performing sector in the S&P 500 and small-cap indices and the second best performer in the mid-cap index due to safe haven trading in the second half of the month.  The technology and communications services sectors were also among the best performing sectors due to strong earnings reports.  Energy with double-digit negative returns was the worst performing sector by a wide margin in each of the market cap indices.   Materials was the second poorest performing sector in the S&P 500 and Russell MidCap indices.  Consumer staples was the second poorest performing sector in the small-cap index.

Both the MSCI EAFE index of developed international country equities and the MSCI Emerging Markets index (EM) posted a negative return for the month.  The EM index underperformed both the EAFE index and the major U.S. indices.  U.S. dollar based returns for both the EAFE and EM indices were lower than the local currency returns since the dollar advanced during the month.  Just as in the U.S., growth stocks outperformed value stocks in the EAFE and EM indices.  Also similar to the U.S. equity market, the energy sector had the lowest return in both the EAFE and EM indices.  In developed international markets, defensive sectors and the financials sector were the top performers.  In the EM index, healthcare, real estate, and communication services had the best returns.  On a geographical basis, the Pacific region and Japan outperformed Europe.  On the EM side, the Latin American region was the worst performing region despite Mexico posting a positive return that was one of the best EM country returns.  Turkey, Egypt, and India were also among the top performing EM countries.

U.S. bond market sector returns were positive in January.  Intermediate and long maturity Treasury bonds posted the highest returns as strong demand for safe haven assets drove prices higher.  The U.S. Treasury 20+ year maturity index had a return of 7% for the month.  Investment grade corporate and municipal bond returns were strong as well.  The corporate high yield index had the lowest return that was just above 0%.  The weakness in oil prices negatively affects the high yield bond index since energy company bonds make up a large portion of the index.

The Bloomberg Commodity index had a return of -7.4% for the month of January.  Returns were negative for each of the sub-indices we track except for the precious metals sub-index.  The precious metals sub-index return was driven by the increase in the price of gold.  The price of gold rose to a 13-year high on safe haven trading.  The energy sub-index had the worst return as oil prices plunged on economic growth and high inventory concerns.  Natural gas prices continued to decline due to warm winter weather.  The price of WTI crude oil ended the month at $51.56 per barrel down from $61.21 at the end of the prior month.  Despite the signing of the phase one trade agreement that includes promises from China to buy substantial amounts of U.S. agricultural products, livestock and grain prices fell on doubts about the pace of Chinese purchases especially with the virus outbreak causing transportation stoppages and business closures.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

The coronavirus outbreak is an example of an unforeseen risk that can influence financial markets at any time.  The virus outbreak is causing a disruption to economic activity that impacts not just Chinese companies but also multinational companies with operations there and companies with supply chains in China.  Companies in other countries including the U.S. will be impacted by the travel bans and the absence of Chinese tourists.  However, it is likely that the impact from the virus outbreak will be temporary given the various actions being taken to contain the outbreak.  Aside from the impact of the virus outbreak, our previous views on the economic outlook remain in place primarily due to the accommodative global central bank policies, the solid U.S. labor market that supports the services sector, and upticks in industrial activity in various regions.  We continue to expect that financial markets could be volatile in reaction to any worsening of the impact of the virus outbreak, any unexpected trade war news, or to U.S. election campaign activity.  Therefore, we continue to favor equities over bonds, but we also continue to recommend holding enough cash reserves to support spending needs for at least the coming 12 months.  Within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international and emerging markets equities.  Within our fixed income recommendation, we continue to favor short to intermediate maturities.  We continue to recommend an underweight allocation to hedge funds.

The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions.  These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance.  Past performance does not guarantee future results.

The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel.  Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group.  An index is not managed and is unavailable for direct investment.