January 2020 Market Commentary

The new year was off to a good start for the S&P 5001.  Even with the Coronavirus scare over the past few days, and a brief sell-off of about -2.5%, the market appeared to be bouncing back fairly quickly (FastTrack data).  However, today (January 31, 2020) the move downward continued, so it doesn’t look like we’re out of the woods just yet.  We are still showing widespread underlying weakness across the NYSE stock universe.

Fortunately, we saw reason to reduce stock market exposure (or risk) in our core equity models just before the January sell-off occurred.  And, our sector holdings in our 403b accounts (mainly Utilities and Real Estate) were strong during that time, keeping down-side exposure minimal.

Looking at market reactions to other virus outbreaks in the past, we believe if China can’t contain the outbreak, there is a good potential for further downside movement in the market – not just in the US, but across the globe.  It’s too early to tell the full scope of the matter, so we’ll continue to monitor where the money is flowing.

In our opinion, the headline news items other than the virus have had unusually low influence on market movement.  The impeachment hearings, for example, are almost a non-issue when it comes to driving stock market movement.  In looking at the two other occurrences of impeachment hearings in US history, our findings conclude that the market usually continues in the direction that it had previously been going before the hearings began.

When Nixon was impeached, the market and economy were not in great shape.  And when Clinton was impeached, the market and economy were fairly strong.  Here is a good article with more detail on prior impeachment hearings.  So, based on limited history, and the current economy and market doing well, our expectations are that the current market positivity could continue for a while (or at least until a global virus outbreak – let’s hope that is not the case).

This months’ chart2 shows the “rainbow” pattern of the S&P 500 so far this year.  The two blue lines intersect where the market closed on December 31st, 2019.  It appears that the upward momentum enjoyed through December hit a wall on January 23rd (see the small blue arrow).  We were able to use this opportunity to lock in some gains as we began to step aside from the potential downside. 

Two month chart of the SPY (S&P 500 etf)2

The Bond market appears to be off to a good start in 2020.  When stock market volatility increases, money tends to flow over to the bond market as a safer (relatively speaking) place to hang out and wait for the storm to pass.  As of today, the Aggregate Bond Index AGG is up more than the S&P 500 this year, which is not something you usually see in a continued bull market.
 
I hope everyone is having a great 2020 so far!  Stay safe and healthy,

 

 

1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
 
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.