Stocks are under near-term pressure due to fears that the coronavirus will disrupt the improving global economy.

While it is impossible to forecast the ultimate impact of this virus, history would suggest a small impact. The 2003 outbreak of severe acute respiratory syndrome (SARS) saw Chinese economic growth fall from about 10% pre-SARS to 3.5% during the outbreak, before rebounding to about 13%. Asian stocks dropped about 15% peak to trough while developed market stocks showed a negligible impact from the event.

Dow Jones-1.21.721.0
S&P 500-
MSCI EAFE-0.60.418.0
MSCI Emerging Markets-2.40.512.9
10-year U.S. Treasury1.681.922.68
30-year U.S. Treasury2.132.393.01

Source: Janney ISG, Bloomberg. Data as of 1/24/19.

After several months of strong gains, stocks were overbought by many metrics and ripe for some type of correction. Meanwhile, we are encouraged by the improving global backdrop, driven by Chinese economic stimulus, easing trade tensions, and low global interest rates. The U.S. economy remains propelled by a healthy consumer. 

U.S. Economic Developments

While it was a holiday-shortened week with few economic reports, last week’s readings remain consistent with steady economic growth.

The preliminary January business surveys, which includes about 85% of final respondents, continue to show a healthy service economy with sluggish manufacturing conditions. The Markit flash services PMI (Purchasing Managers’ Index) rose for the third month in a row and to the highest level since last March. In contrast, the flash manufacturing PMI slid to a three-month low, indicating soft (but still positive) factory activity to start the year. The composite PMI, which combines the service and manufacturing sectors, showed the highest level of economic growth since last March. We continue to expect improvement in manufacturing conditions driven by an improving global backdrop with reduced trade uncertainty and low interest rates.

Housing data remains constructive with existing home sales up 3.6% in December, the most in 10 months, to a 5.54 million unit annual rate, the highest level since February 2018. Sales were up 10.8% y/y, the fastest pace since November 2016. Households are well positioned to drive up sales in 2020, amid low unemployment, solid job and wage growth, more household formations, and low mortgage rates.

The Bloomberg Consumer Economic Expectations Survey showed more net optimism about the economy in January. The improvement was driven by a significant drop in the share of consumers who expect conditions to worsen, tumbling to 22%, the least since March 2002. This bodes well for the outlook for consumer spending growth this year. Consumer sentiment has been supported by strong labor market conditions. Despite initial claims for unemployment insurance rising last week to 211,000, the trend has moved little since bottoming in April of last year, and continues to hover near its lowest level since 1969, reflecting tight labor markets.

Preliminary Global Business Surveys Show Signs of Recovery

The flash PMIs (preliminary business surveys that include 85-90% of respondents) for the Eurozone point to stabilization in manufacturing conditions with the manufacturing output index hitting a five-month high while business confidence hit a 16-month high. Encouragingly, the “big-2” eurozone economies of France and Germany saw a positive start to the year, with combined output growth at a five-month high. Importantly, Germany showed signs of recovery as overall output rose for the second successive month amid a first increase in new orders since last June.

Meanwhile, positive signs have emerged for Japan’s economy at the start of 2020, with flash PMI data pointing to a domestic-led economic recovery. The services economy is leading the recovery with demand improving solidly in January. Manufacturing confidence also edged up, in the wake of easing U.S.-China tensions and some optimism regarding Japanese-Korean relations.

This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. Past performance is not necessarily a guide to future performance.


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