Market Update for the Month Ending February 29, 2020

Presented by Steve Grogan

A turbulent February for markets

February was a tough month for markets, as investors were spooked by news about the spread of the coronavirus. The S&P 500 fell by 8.23 percent, the Dow Jones Industrial Average (DJIA) dropped by 9.75 percent, and the Nasdaq Composite lost 6.27 percent.

This sell-off came despite positive fundamentals, with fourth-quarter earnings for the S&P 500 continuing to come in above expectations. Per Bloomberg Intelligence, as of February 20, the blended average earnings growth rate for the S&P 500 stands at 1.3 percent for the fourth quarter, with 86 percent of companies reporting.

Technicals were far less supportive for U.S. equities. Both the S&P 500 and DJIA ended below their respective 200-day moving averages. The Nasdaq Composite was the only major equity index that finished above its trendline.

The story was much the same internationally, with the MSCI EAFE Index falling by 9.04 percent. Emerging markets fell by 5.27 percent in February. Technicals were a headwind for international markets, with both indices finishing below their respective 200-day moving averages.

The major beneficiary from the risk-off sentiment was investment-grade fixed income. Investors sold out of riskier asset classes and flocked to the relative safety of bonds. The 10-year Treasury yield fell sharply, starting February at 1.54 percent and finishing at 1.13 percent. Falling yields drove the Bloomberg Barclays U.S. Aggregate Bond Index to a gain of 1.80 percent.

High-yield fixed income did not fare as well. The Bloomberg Barclays U.S. Corporate High Yield Index was positive for much of the month. But the risk-off sentiment that pervaded markets hit high-yield bonds near month-end, causing a decline of 1.41 percent. Investors demanded more yield to compensate for perceived higher levels of risk. As a result, credit spreads for high-yield bonds widened.

Putting volatility in perspective

Concerns about the spread of the coronavirus were the major driver of market volatility in February. In January, fears were focused largely on the spread of the disease in China. But in February, news that the virus had spread throughout much of the world spurred fears of a pandemic.

Market reactions to this larger-scale problem were severe, as was the case with previous epidemics, such as Ebola, Zika, and SARS. With each of these epidemics, however, we saw short-term volatility followed by quick recovery once the disease was contained. Data from China and other countries shows that, so far, the spread of the coronavirus is moderating. So, it is not unreasonable to expect a similar market recovery.

Economic updates positive, despite coronavirus threat

While investor attention was dominated by the sell-off at month-end, many of the economic updates released during the month showed signs of an improving economy. February’s consumer confidence reports were encouraging, with both major measures of consumer sentiment increasing to multi-month highs. Consumer sentiment remained resilient despite the spread of the virus.

Consumer spending data was solid as well. Headline retail sales grew 0.3 percent in January, marking the fourth straight month of headline sales growth. Housing sales were also impressive, with existing home sales up nearly 10 percent year-over-year. New home sales were even more notable, increasing by 7.9 percent. This brought the pace of new home sales up to its highest monthly level since 2007, as you can see in Figure 1.

Figure 1. New Home Sales, 2007–Present

Businesses also showed improving confidence and spending figures. Both manufacturer and nonmanufacturer confidence increased by more than expected in January. Durable goods orders came in better than expected for both December and January. Core durable goods orders increased for the third straight month. This indicates the slowdown we saw in business investment throughout much of 2019 may be reversing. These positive economic fundamentals will provide a substantial cushion for any economic damage from the virus.

Fundamentals vs. risks

Despite the strong fundamentals, risks remain, and more volatility is likely. That said, markets are now pricing in quite a bit of risk, and there is potential for good news to lead to a market rally. In the U.S., fundamentals and spending are strong. So, we can still expect economic growth to continue in 2020.

Ultimately, the major risk to the economy is the potential for a sharp drop in confidence. Given the likelihood of further short-term volatility, February’s results remind us of the importance of constructing portfolios that can withstand volatility. A well-diversified portfolio that matches investor goals and time horizons remains the best path forward.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

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Steven Grogan is a financial advisor located at Atticus Wealth Management, 51863 Schoenherr Road, Suite 102, Shelby Township, MI 48315. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 586-588-9449 or steve@planwithatticus.com.

Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network®

© 2020 Commonwealth Financial Network®