Weekly Market Update — February 24, 2020

By Hightower St. Louis on February 23, 2020

MARKETS RETREAT AS CORONAVIRUS WORRIES INTENSIFY, PUSHING THE 30–YEAR TREASURY TO ITS ALL–TIME LOW

• The tech–laden NASDAQ and the broad, large–cap S&P 500 both hit new closing records this week, but trailed off toward the end of the week and finished in the red
• NASDAQ lost the most with a –1.6% return, followed by the DJIA’s loss of 1.4% and the S&P 500’s decline of 1.3%
• In a departure from most recent weeks, the smaller–cap Russell 2000 led the way, but still lost 0.5% and the MSCI EAFE Index performed better than its U.S. counterparts with a –1.2% return
• Apple was in the news a lot this week, as the $1.4 trillion technology giant issued a revenue warning due to the coronavirus. Shares dropped about 3% on the news and then rallied, but many fear that Apple is just the beginning of soon–to–come bad news due to China’s worsening virus
• Given the negative tone for much of the week, it was no surprise that of the 11 S&P 500 sectors, Information Technology led the losers as it gave back 2.5% on the week
• The only S&P 500 sector not in the red was Real Estate and it was flat for the week
• The housing market delivered some positive news around building permits and housing starts, but it was followed by some negative news about the Purchasing Managers’ Index, which contracted
• The 2–year Treasury yield dropped 7 basis points to 1.35% and the 10–year dropped by 10 basis points, coming to rest at 1.46%, a five–month low
• The yield on the 30–year Treasury hit the lowest level on record at 1.89%
• The U.S. Dollar Index hit a three–year high and finished the week up 0.2% higher
• WTI crude rose almost 3% to $53.37/barrel

Weekly Market Performance

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Coronavirus Fears Cause Stocks to Retreate

U.S. markets were closed Monday in observance of Presidents’ Day and before the markets opened for the week, there was some bad news reported from Apple.

On February 17th, Apple surprised Wall Street by saying it would not meet its fiscal second–quarter revenue guidance due to the coronavirus. The company worth $1.4 trillion saw a huge spike in trading volume and its share price dropped by more than 3% the next day, wiping out about $45 billion in market cap.

Apple’s bad news was followed two days later by an analyst with Bernstein nearly doubling his price target for Tesla, pushing the price of its stock to zoom above $900 and end the week just north of $900.

During Apple’s warning and Tesla’s meteoric rise, both the S&P 500 and NASDAQ hit record highs on Wednesday before retreating the remainder of the week. Most of investors’ worry seemed focused on the coronavirus and that was felt the most by the Technology sector as concerns about supply–chain issues out of China are uncertain. And if the markets hate anything, it’s uncertainty.

January Building Permits Reach 13–year High

On Wednesday, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development announced that Building Permits surged to a near 13–year high and Housing Starts rose, but not as much as previously estimated. According to the Release:

• Building permits in January were at a seasonally adjusted annual rate of 1,551,000
• This is 9.2% (±2.1%) above the revised December rate of 1,420,000 and is 17.9% (±1.3%) above the January 2019 rate of 1,316,000.
• Housing starts in January were at a seasonally adjusted annual rate of 1,567,000
• This is 3.6% (±13.3%) below the revised December estimate of 1,626,000, but is 21.4% (±12.2%) above the January 2019 rate of 1,291,000

The housing market is supported by the fact that the average 30–year fixed mortgage rate is 3.47%, its lowest level since October 2016 according to Freddie Mac. All of these data points underscore continued strength in the housing market.

But the Purchasing Managers’ Index is Contracting

At the end of the week, IHS Markit released its Purchasing Mangers’ Index data. The Purchasing Managers’ Index – or PMI – is data from more than 40 economies worldwide. According to IHS Markit, “the PMI dataset features a headline number, which indicates the overall health of an economy, and sub–indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories.”

According to the release from Friday, here is what the data reported:

• U.S. Composite Output Index stood at 49.6 (53.3 in January), a 76–month low
• U.S. Services Business Activity Index stood at 49.4 (53.4 in January), a 76–month low
• U.S. Manufacturing PMI at 50.8 (51.9 in January), a 6–month low.
• U.S. Manufacturing Output Index stood at 50.6 (52.4 in January), a 7–month low

The Chief Business Economist at IHS Markit, had this summary:

“With the exception of the government–shutdown of 2013, US business activity contracted for the first time since the global financial crisis in February. Weakness was primarily seen in the service sector, where the first drop in activity for four years was reported, but manufacturing production also ground almost to a halt due to a near–stalling of orders.

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Total new orders fell for the first time in over a decade. The deterioration in was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions. However, companies also reported increased caution in respect to spending due to worries about a wider economic slowdown and uncertainty ahead of the presidential election later this year.”

Sources

markiteconomics.com; bea.gov; bls.gov; census.gov; standardandpoors.com; factset.com; nyse.com; msci.com;
nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com

Omar Qureshi, CIMA®, CPWA®

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