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Market Overview

Coronavirus Outbreak, IMF Forecast, Impeachment Trial Weigh On Investor Sentiment

Coronavirus Outbreak, IMF Forecast, Impeachment Trial Weigh On Investor Sentiment

As U.S. investors returned to their desks to begin a holiday-shortened week, they were facing some concerns that seemed to be eating into the optimism that led stocks to record highs last week.

The deadly coronavirus outbreak in China brought back memories of the economic repercussions from the Severe Acute Respiratory Syndrome (SARS) outbreak in the early 2000s, which hit the major financial center of Hong Kong hard. 

Stock market sentiment also appears to have taken a dent after the International Monetary Fund reduced its forecast for 2020 global economic growth to 3.3% from the 3.4% it had previously projected. Still, the new figure would be an increase from an estimated 2.9% growth in 2019. 

It also seems that President Trump’s impeachment trial may be adding a layer of caution to the market. But overall, traders and investors don’t seem too worried about it. 

Even though the market could be set for a pullback today, that might not be a bad thing. Although stocks have hit a string of records recently, it’s unrealistic to think we can continue going straight up. Some companies will come out with great earnings, but whisper numbers might be higher, leading to some disappointment. A small sell-off, say around 3%, at some point could actually help to stabilize things.

About Last Week

Last week was encouraging on a few fronts.

Even though it was expected, getting the initial trade deal actually signed was a big deal. The general calm-down about the tariff situation has been a boon to the stock market, helping indices hit record highs and especially helping the trade-sensitive tech sector. 

While ink has been put to paper and it’s still only a partial deal, the market seems to be much relieved at the easing of trade tensions between the world’s two largest economies. 

Another boon for the market last week was a solid showing from most of the big banks that reported earnings. While results from Wells Fargo & Co (NYSE: WFC) and Goldman Sachs Group Inc (NYSE: GS) weren’t as stellar, when you look at those two, the issues were isolated to specific things going on at the companies and didn’t reflect industry trends.

On Friday, the Utilities sector had a pretty good day and on a yearly basis is showing gains that are roughly comparable to gains in other sectors, aside from the outsized gains in the Technology sector.

Normally, Utilities is a defensive sector, so you might expect these stocks to lag behind other sectors amid this stock market rally we’re seeing. But the sector could be moving with much of the rest of the market as a sign of how broad-based the rally is. People might be thinking bond prices might rise and rates fall, helping Utilities as a bond proxy by increasing its allure for yield-seeking investors. Maybe people see Utilities as a longer-term hedge—along with bonds and gold—or feel like the sector just hasn’t been loved as much as it could have been.

Earnings Season Picks Up

After a focus on the big banks last week, earnings you might want to monitor this week include IBM (NYSE: IBM), Netflix Inc (NASDAQ: NFLX), Abbott Laboratories (NYSE: ABT), Johnson & Johnson (NYSE: JNJ), Texas Instruments Incorporated (NASDAQ: TXN), Intel Corporation (NASDAQ: INTC), Union Pacific Corporation (NYSE: UNP),  Southwest Airlines Co (NYSE: LUV), and United Airlines Holdings Inc (NASDAQ: UAL). 

Semiconductor shares might be in sharp focus considering INTC and TXN are on the schedule. And those names are important gauges of people’s confidence going forward. Those companies, and others in the tech space, have exposure to China. Now that the trade war tensions have eased considerably, it could be interesting to see what stories their numbers tell about the quarter that was and if their executives have anything to say about their outlooks on the trade situation going forward. 

NFLX’s anticipated Q4 programming lineup could help the company.

Expectations are for paid membership subscription adds of 9.7 million, well above the streaming platform’s 7.6 million forecast. This could help the stock price. On the other hand, even if their numbers are above consensus estimates, it’s important to look at the competition as well as production challenges in the international space.

It could be interesting to see how UNP did during the previous quarter and what its outlook is given the mixed messages we’ve been seeing from railroad companies. Although CSX Corporation (NASDAQ: CSX) reported earnings that beat estimates, it had a slight revenue miss and reported a bigger-than-forecast drop in freight volume. Meanwhile, Kansas City Southern (NYSE: KSU) reported weaker-than-expected earnings and revenue

Continuing with this week’s transportation theme, it seems likely that investors will be tuning in to LUV’s and UAL’s earnings releases, not just to learn about those companies themselves but also to see if they offer any glimpses into the Boeing Co (NYSE: BA) 737 Max situation. 

CHART OF THE DAY: UTILITIES ON THE RISE: The Utilities sector ($IXU—candlestick) performed relatively well on Friday and has been having a pretty good year so far. Although the S&P 500 Index (SPX—purple line) is outpacing the Utilities sector over the last three months, as this chart shows, their one-year performance isn’t all that different. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Another Cheer for the Consumer: On Friday, the latest consumer sentiment index from the University of Michigan came in ahead of expectations. The preliminary index for January notched a 99.1, slightly above a consensus expectation of 98.9. The new number was slightly below the previous reading of 99.3, but the survey’s chief economist, Richard Curtin, said consumer sentiment was “virtually unchanged” in the early part of the month, with stability extending to all components of the index.

He noted that impeachment was barely mentioned. Generally, this indicator has been on the climb since last summer, supporting claims that consumers are in good shape. “The current (economic) expansion has established a new record length largely due to consumer spending,” Curtin said in a statement accompanying the newest index data. “Consumers will continue to sustain the expansion due to their favorable judgements about their current and prospective financial situation.”

Existing Home Sales Could Remain Constrained:This week is pretty light on economic data, but existing home sales for December could be interesting to watch. A consensus expects the figure to come in at a seasonally adjusted annual rate of 5.42 million units. That would mark an improvement from the 5.35 million units in the November reading. Sales spent much of 2019 bouncing around in a range from roughly 5.2 million to 5.5 million.

That’s not to say that the housing market is stagnating, because it appears that there is demand out there. It’s just that, as put it, sales have been held back by rising prices and a lack of available supply. 

Surge in Housing Starts: The supply issue seems to be working itself out, however, as last week we saw data that showed housing starts in December hit a 13-year high, rising nearly 17% to an annualized pace of 1.61 million, way above analyst predictions. It seems that low mortgage rates and a strong domestic employment situation are boosting demand for housing. And once these new houses hit the market, they could help bring down prices across the board and loosen up supply, potentially helping goose sales of existing homes. 

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy.

Image by skeeze from Pixabay


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