Coronavirus Kills Hundreds, Infects Thousands, Threatens Global GDP… As China tries to stem the spread of the virus, investors try to determine how much the disease will affect commerce.
What it means – The Chinese markets have been closed for the Lunar New Year, so the country has been able to sidestep the elephant in the room… how much will the coronavirus shave off the national GDP? By design, the Chinese economy is much more dependent on domestic consumption today than it was during SARS in the early 2000s and even H1N1 in the late 2000s. With the national government enforcing all out quarantines of cities and widely discouraging large gatherings – think shopping malls, restaurants, and movie theaters – in general, there’s no doubt the virus will cut growth. And it won’t stop at the borders.
Domestic consumption includes buying local goods as well as imported goods. Companies like Tiffany’s, Tapestry (the old Coach), and even Apple could be at risk for lower sales. Starbucks shut down more than 2,000 of its 4,000 locations across the nation.
Experience suggests that the disease will be contained in short order, and the economic damage done will quickly pass. If other things remain equal, such as the Fed buying bonds to support the repo market, then this may be more of a buying opportunity than the start of a major sell-off. However, stocks below the 200-day moving average has increased along with selling volume. On the NYSE, stocks with momentum have been running five to one sellers. We will update this in next week’s webinar.
Fourth-Quarter GDP Expands at 2.1% Annual Pace… Falling imports and strong consumer spending kept GDP near the long-term average of 2%.
What it means – Well that’s not very exciting. We were told in late 2017 that if we supported massive tax cuts for corporations, then they would spend their newfound profits on their businesses, thereby driving economic growth. It hasn’t worked out that way.
Earnings popped and the stock market roared, and GDP did bump from 2% to 3% for one year. But now we’re back to where we started with the economy expanding at the moribund rate of 2%, but we’re also running trillion-dollar deficits. Even that modest growth rate is a bit distorted. GDP was pushed higher by a dramatic drop in imports after companies rushed to get goods in the door in the third quarter ahead of new tariffs in the fourth quarter. Falling imports help the net export-minus-import portion of the GDP equation.
Durable Goods Orders Up 2.4% on Defense Spending… December durable goods orders jumped after the government authorized higher military spending in a year-end legislative push. Without that, durable goods orders fell 2.5%
What it means – Durable goods orders were slammed by the continued controversy surrounding Boeing’s 737 Max. Stripping out transportation, orders fell 0.1%. Not great, but not terrible. But non-defense orders excluding aircraft, a proxy for business spending dipped about 1%, which shows that businesses remain reticent about investing in plant and equipment. It’s a consumer and government-driven economy, which is great as long as consumers continue to spend. When that rolls over, it could get ugly.
Fed Leaves Rates Unchanged, Extends Bond-Buying To April… As expected, the Fed left overnight interest rates unchanged in a range of 1.50% to 1.75%. The central bank also said it would extend bond buying meant to shore up the repo market from February into April.
What it means – No one believes the Fed. Yes, they kept rates steady as expected, and most people expect rates to remain where they are at least through the summer assuming the markets don’t fall out of bed. Regarding the bond-buying that keeps repo rates from soaring out of control, few people think the Fed will cut off the institutions that rely on such financing. If they did, it would send the markets into a tailspin. Financial institutions use the repo money to invest.
There is a direct link between the Fed pumping cash into the markets and equity and bond prices moving higher. When asked about the repo financing, Fed Chair Powell said, “It’s hard to say at any time with any precision what is affecting markets.” Maybe that’s true most of the time, but right now it’s easy. It’s the Fed. If they end the financing, investors need to step aside and let the markets exhale.
New Home Sales Fell 0.4% in December… The rate of sales in the last month of the year marked the third consecutive decline. Sales dipped to an annual rate of 694,000, with sales in the South dropping to the lowest rate in a year. The drop surprised analysts who expected sales to increase to 730,000. But it’s not all bad news. For all of 2019, sales increased to 681,000 units, 10.3% higher than in 2018 and the highest number of sales since 2007.
Sales were concentrated in the $200,000 to $749,000 range, with a strong interest in the sub-$200,000 sectors. The story remains the same, too many buyers at the low end without enough supply
S&P CoreLogic Case-Shiller 20-City Home Price Index Ticks Up 2.6% in November Over Last Year… The index had been easing toward zero last summer but appears to have bottomed near 2% growth and reversed trend.
What it means – We thought this index would fall through zero this spring, but that doesn’t appear to be the case. For several months, it hung around 2% growth and now has inched higher. With mortgage rates sitting near 3.6% and unemployment at 50-year lows, consumers are confident enough to buy homes. Now if we could just get enough stock on the market, the real estate sector could add more to the economy.
Some Confuse Coronavirus with Corona Beer… Google recorded a 1,000% spike in searches for “coronavirus,” and “how to prevent coronavirus” in the third week of January. With news of the virus spreading through Wuhan, China and beyond, killing hundreds and infecting thousands, that’s not surprising.
BoingBoing, one of the largest blogs in the world, noted a jump in searches for the “Corona beer virus.” There is no such thing, unless you count the ill effects of consuming too much of the brewed beverage. The word corona comes from the Latin term, which means “crown,” and is still used in Spanish. Corona beer has a crown above the words La Cerveza Mas Fina on the bottle, while the virus has tiny spikes on its surface, making it appear like a crown. Other than sharing the word, the two aren’t connected.
Data supplied by Dent Research/Delray Beach Publishing
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