February Economic Update

Market Summary

The beginning of 2020 entailed many newsworthy developments, including President Trump signing the “Phase-One” China trade deal, heightening tensions between America and Iran, wild swings in the oil markets, an impeachment trial, and stock indices hit record all-time-highs amongst it all.

Mostly positive corporate earnings reports and easing tensions between the U.S. and China lifted stocks for the first half of the month. However, these early monthly gains eroded in late January as the coronavirus emerged as a global health concern, and correspondingly, a concern for the investment markets. To end the month, the S&P 500 ended up retreating 0.16% for the month. (1)

Coronavirus Concerns

Investors worldwide wondered if the flu-like coronavirus would hurt the powerful Chinese economy, where the disease was first reported in December. Nearly 10,000 Chinese citizens had been infected by the end of January, and the World Health Organization declared a public health emergency over the outbreak. If enough Chinese consumers are kept at home, corporate earnings could be hurt, and central banks might have to take action in response to slumping financial markets. A larger scale spread of the virus to the U.S. and/or Europe would undoubtedly cause a larger pullback for the global markets.

Historically, the stock market has very short-term reactions when epidemics arose in the past. The 2003 SARS outbreak, the Ebola scare of 2014, and the Zika virus epidemic of 2016 ended with the S&P yielding a 6-month change of 14.59%, 5.34% and 12.03% respectively. History doesn’t always repeat, but it often rhymes. However, no epidemic is predictable, and these concerns are on the top of Wall Street’s mind at the moment. (2)

Real Estate Market Update

For the entire year of 2019, the number of existing home sales improved by 10.0% in 2019, according to the National Association of Realtors. This happened despite the median sale price of a single-family home rising 7.8% over the year, to $274,500 by December.

Residential resales increased by 3.6% during the last month of 2019, reaching a pace not seen since February 2018. The NAR’s pending home sales index, however, fell 4.9% for December. One possible factor influencing that pending home sales dip: a record-low 1.4 million listings were on the market. Mortgage rates remain low, which has prompted an influx of new mortgage applications. As of January 30th, Freddie Mac’s Primary Mortgage Market Survey reported 30-year fixed-rate mortgages are averaging a 3.51% interest rate and 15-year fixed-rate mortgages are averaging a 3.00% interest rate. (3,4,5)

A Choppy Start to 2020

Economic data has improved recently, along with strong earnings reports from many large U.S. companies this past month – albeit more mixed this last quarter. Tech giants Apple and Amazon impressed, while Google and Facebook took somewhat of a faceplant. (1)

Stock valuations relative to corporate earnings among S&P 500 companies are reaching valuations not seen in over a decade. Bond and gold prices continue to rise as well, which historically has been a sign of caution. The equities rally of the last half of 2019 has been nicknamed “the most hated rally of all time” as many hedge fund managers and individuals were not fully invested to reap these gains. While we have remained cautiously optimistic throughout this time, the risk / reward ratio becomes less favorable as the markets continue to rally. For now, the phrase, “the trend is your friend” certainly applies with this upward trajectory, but we remain vigilant in watching for any signs of a reversal.

Monthly Financial Tip:

If you are considering disability insurance, seek coverage with a benefit amount of approximately 60% or more of your current income.

Citations

1 - us.spindices.com/indices/equity/sp-500 [2/2/20]

2 - https://tinyurl.com/vbdvm7r [1/22/20]

3 - marketwatch.com/tools/calendars/economic [2/3/20]

4 - reuters.com/article/usa-economy-housing/us-existing-home-sales-surge-to-near-two-year-high-idUSL1N29Q1U2 [1/22/20]

5 - freddiemac.com/pmms/archive.html [2/3/20]

Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.