The stock markets started 2020 right were they left off in 2019 – a steady climb to new all-time highs. What was driving the market higher?
I would call it “peak happiness” – a wonderful mix of a high level of valuation, investor confidence, financial liquidity and risk appetites. In fact, stocks were almost back to where they were in 2017 when they hit “peak happiness,” marking the highest level achieved during this decade-long bull market.
Similarly, trader sentiment and hedge-fund positioning were almost — but not quite — as unreservedly aggressive as they were then, as investor surveys and the patterns in options-trading volume confirm. Bespoke Investment Group calculates the market has been statistically “overbought” 98% of all days since October, the longest such stretch since late-2017-early 2018.
While stock gains and all-time highs are great, the underlying fundamentals leave the market vulnerable to a sudden correction when any of these “happiness” factors reverses or an unexpected catalyst appears. And many times, the more extended the stock market is, the farther it falls when the happiness ends. The catalyst for the correction back in late 2017 was rising interest rates, tightening liquidity and recession fears. This time the catalyst is the coronavirus.
Financial markets hate uncertainty and widespread medical emergencies fit in that category. Historically, there is a negative short-term reaction to these types of catalysts, but long-term results have generally been positive.
Economists currently estimate the outbreak could lower China GDP (gross domestic product) by 1%. The impact on the US economy will be less as our GDP is more dependent on domestic demands. The world economy, however, may slow back towards stall speed (less than 1% growth) as China has been a major driver of global growth.
What does it all mean to you?
In the short-term, stocks will certainly be more volatile and likely to continue to fall. Longer term, the US economy looks stable and capable of managing through. However, much depends on how widespread the coronavirus spreads and how long it takes authorities to get it under control.
While my cautious approach in the late fall of 2019 looked wrong-footed given the equity market gains at the end of last year, I am glad we remained neutrally positioned as that bodes well for this period of uncertainty and volatility.
Please call me if you have any questions or concerns about the markets, economy or your portfolio.
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February Calendar of Events (comments and additions for future months are always welcome)
- February is Black History Month. Let’s all strive for understanding and acceptance for people of all colors, nationality, and religions.
February 2nd Groundhog Day – yay he didn’t see his shadow. No let’s hope he’s reliable!
February 14th Valentine’s Day
February 17th Presidents Day
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Sources: Julex Capital, FactSet, CNBC, Bespoke Investment Group
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