Stocks fell last week in response to the economic uncertainty created by the coronavirus outbreak.

While it is too early to estimate its overall impact, disruptions from the virus are expected to have a measureable impact on near term economic growth, with drags concentrated in China and related emerging markets. China is responding aggressively to contain the outbreak—while this is a near-term economic shock, it should prevent a longer economic disruption.

Dow Jones-2.5-0.915.8
S&P 500-
MSCI EAFE-2.5-2.112.8
MSCI Emerging Markets-5.1-4.74.1
10-year U.S. Treasury1.511.922.68
30-year U.S. Treasury2.002.393.01

Source: Janney ISG, Bloomberg. Data as of 1/31/19.

Markets will probably remain under pressure until the number of cases appears to be peaking, but we view this as transitory—the underlying economic fundamentals remain constructive. Trade uncertainty has been reduced, earnings results are coming in ahead of expectations, and inflation remains low and is allowing central banks to remain very easy with monetary policy. China is also applying additional economic stimulus as a result of the outbreak.

U.S. Economic Developments and Analysis

Last week’s economic readings remain consistent with steady economic growth. The Conference Board’s Consumer Confidence Index increased better than expectations in January. While off its cycle peak, the index is still elevated and close to its highest level in nearly two decades. Both the present situation and consumer expectations improved, due to a more favorable assessment of current and future job market and business conditions. Confidence was mixed by demographic group, but rose across most income categories. Notably, the bottom income category posted its highest level of confidence since December 2000. Consumer Confidence continues to support a positive outlook for consumer spending growth and the broader economy in 2020.

While new home sales dipped 0.4% in December, they were up 10.3% in 2019 to 681,000 units, the highest level since 2007. While pending home sales declined 4.9% in December, they’ve increased 4.6% on a year-over-year basis, showing contract signing momentum remains positive. Meanwhile, recent mortgage application activity supports a positive housing market outlook for the near-term. The MBA Purchase Index rose 5.3% last week, up in four of the past five weeks, and reaching its highest level since January 2009. We expect housing to continue supporting economic growth in 2020. Housing economic fundamentals remain healthy—including low unemployment, continued job creation, steady income growth, more household formations, high consumer confidence, and low mortgage rates.

While fourth-quarter economic growth came in steady with third-quarter growth at 2.1%, the economy remains resilient amid the global economic slowdown, trade conflicts, and a waning effect of the 2017 tax cuts. Importantly, inflation pressures remain subdued and below the Federal Reserve’s inflation target of 2.0%, supporting the current low interest rate policy stance.

The Philly Fed State Coincident Indexes increased in 37 states in December, decreased in nine, and were unchanged in four. These state indexes are consistent with minimal odds of a near-term recession.

An Update on a Positive Earnings Season 

About 58% of the S&P 500 stock indexes companies have now reported fourth-quarter results. Earnings are beating by 4.9%, with 62% of companies exceeding their bottom-line estimates. This is in line with the 5.2% and 71% over the past three years. Fourth-quarter expectations are for revenues, earnings, and earnings-per-share (EPS) growth of 2.6%, -0.6%, and +1.7%, respectively. EPS is on pace for +3.2%, assuming a typical beat rate for the remainder of the season. Although aggregate S&P 500 EPS is projected to rise by +1.7%, the median company is expected to grow +5.2%. Financials, Technology and Health Care are leading EPS growth. We expect positive earnings growth, driven by improving economic growth, to support stocks as we move through 2020.

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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