Global stocks bounced this week, as Chinese authorities injected billions of dollars into the financial system and eased monetary conditions to offset declines from the Coronavirus that had sunk emerging market equities. The People’s Bank of China used over $70 billion of stimulus to offset declines, while the rate of spread for the virus eased, offsetting worries that a major slowdown would result from a global pandemic. The stimulus efforts there, combined with continued strong earnings reports in the US and a turnaround in manufacturing data, pushed equities back to record highs. Meanwhile, bond yields faced a rapid reversal, with the 10 year treasury rebounding higher as investors jumped back into risk assets. However, the yield curve remains inverted at this time, a reminder that recession could still be on the horizon.
A combination of factors are leading to the underlying bullishness we’re seeing in markets at this time. After last year’s manufacturing plunge, data is finally turning around, with factory orders advancing 1.8% in December and the purchasing managers index moving back into expansion territory in January for the first time in 6 months. Adding to the positive news, employers ramped up hiring in January, taking on the most workers since May of 2015, exceeding most economists’ estimates, with a particular uptick in hospitality and leisure companies’ hiring. Corporate earnings aren’t looking too bad either, with most S&P 500 companies exceeding estimates and suggesting more growth ahead. Along with these powerful fundamental drivers, central banks also continue to provide liquidity and support to markets, in an effort to keep the expansion on solid footing. Lastly, policymakers globally are considering fiscal stimulus in the form of tax relief and spending to boost economic growth. Combined, this powerful cocktail of data points reinforces the “goldilocks” environment we’ve found ourselves in for more than a decade now, with low inflation and borrowing costs, and steady growth and hiring.
As stated before, we’re not making any overly aggressive moves at this time, as unknowns remain around the virus’ potential impact on the global economy, particularly Chinese spending and investment. We did make some limited purchases last week to add to risk assets, as we believe the selloff was overdone, but we remain confident in our strategic allocation for meeting client goals. There still appears to be more downside risk than upside potential in markets in our view, and the age of the current bull market as well as recessionary indicators firing leads us to pause before making large bets in equities. Despite equities being the best game in town, any return to “normal” levels of volatility could challenge investors’ resolve and prove once again the value of diversification. With the upcoming US presidential election, considerable issues facing Fed policy this year, and weakened growth around the world, its anyone’s guess when the next pothole will be hit for a market that is seemingly on autopilot. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.