Market Commentary – February 2020
With a growing number of countries reporting new cases of the coronavirus, the obvious spread of this dreaded virus prompted a massive panic sell-off, the likes of which haven't been seen since 2008. Investors' fears of widespread economic tumult caused by the coronavirus were too much to ignore, despite last Friday's statement from Fed chairman Jerome Powell that the central bank was prepared to cut rates if necessary when it meets in March. Crude oil prices fell by over $6 per barrel since the end of January. The 10-year Treasury note fell to a record low as money flowed into long-term bonds, pushing prices higher and yields lower.
By the close of trading on the last day of February, each of the benchmark indexes listed here sustained major losses, led by the Dow, which fell by more than 10.0%. The small-cap Russell 2000 dropped more than 8.50% for the month, followed by the S&P 500, the Global Dow, and the tech stocks of the Nasdaq. Year-to-date gains achieved in January and the first part of February were wiped out, with three of the benchmark indexes listed here trailing their 2019 closing values by double digits. The Russell 2000 fell by nearly 12.0%, followed by the Dow and the Global Dow, which lost close to 11.0%, respectively.
By the close of trading on February 28th, the price of crude oil (WTI) was $45.19 per barrel, well below the January 31st price of $51.61 per barrel. The national average retail regular gasoline price was $2.466 per gallon on February 24th, down from the January 27th selling price of $2.506 but $0.076 more than a year ago. The price of gold finished February at $1,585.80, slightly lower than its January closing value of $1,592.70.
|Market/Index*||2019 Close||Prior Month||As of February 29 th||Monthly Change||YTD Change|
|S & P 500||3,230.78||3,225.52||2,954.22||-8.41%||-8.56%|
|Federal Funds||1.50% – 1.75%||1.50% – 1.75%||1.50% – 1.75%||0 bps||0 bps|
|10-yr Treasury||1.91%||1.52%||1.12%||-40 bps||-79 bps|
*Chart reflects price changes, not total return
Last Month's Economic News
- US employers ramped up hiring in January and wage gains rebounded, providing fresh evidence of a durable jobs market that backs the Federal Reserve’s decision to stop cutting interest rates and hands President Donald Trump an early election-year boost. Payrolls increased by 225,000 after an upwardly revised 147,000 gain in December. The jobless rate edged up to 3.6%, still near a half-century low, while average hourly earnings climbed 3.1% from a year earlier. The participation rate, or share of working-age people in the labor force, climbed to 63.4%.
- Annual revisions to historical data took some shine off one of Trump’s main bragging points, cutting the 2018 job gain to 2.31 million from 2.68 million. The 2017 and 2019 gains were about 2.1 million, meaning each year under Trump, while still strong, has been slightly slower than the 2.35 million rise in the final year of the Obama administration.
- A gauge of US manufacturing rebounded sharply in January, topping estimates and signaling growth in the beleaguered sector for the first time since July. The Institute for Supply Management’s purchasing managers’ index, based on a survey of manufacturers, increased to 50.9 in January from an almost four-year low of 47.8. The gain reflected sizable improvements in the orders and production components, while the employment gauge contracted at a slower pace. The new orders index jumped to an eight-month high of 52 and the production gauge surged 9.5 points, also the largest gain in more than six years.
- Firmer business activity and orders helped lift a gauge of US service providers to a five-month high in January, indicating steady growth in the broader economy at risk of wavering amid mounting concerns about the coronavirus. The Institute for Supply Management’s non-manufacturing index climbed to 55.5, exceeding the median projection in a Bloomberg survey of economists, from 54.9 a month earlier. A measure of business activity climbed to an almost one-year high. The ISM’s measure of new orders at US service providers increased to 56.2 in January from a three-month low. Other details from the report were less upbeat. Measures of employment, order backlogs, and exports all softened from the end of 2019. The improvement in services activity and a rebound in the ISM’s manufacturing gauge show business optimism was building just as the coronavirus epidemic began to exact a bigger toll, both in terms of the growing number of lives lost and economic disruption.
- Productivity in the US rose less than forecast in the closing months of 2019, indicating the efficiency gains are settling back to their sluggish trend. Nonfarm business employee output per hour increased at a 1.4% annualized rate in the fourth quarter. That was smaller than the 1.6% projection in a Bloomberg survey of economists and followed a 0.2% decline in the third quarter. Unit labor costs were also up at a 1.4% rate following a 2.5% pace in the previous three months. While productivity growth averaged 1.7% for all of last year, the best since 2010, efficiency gains have been lackluster in the current expansion. Weak productivity may explain the more moderate pace of wage growth during the expansion.
- US retail sales rose in January for a fourth straight month as cheaper prices at the gas pump encouraged Americans to spend, though a core measure of demand softened. The value of overall sales climbed 0.3%, but the so-called control group, which is used to calculated GDP, was unchanged in January after a downwardly revised December gain. The control group excludes food services, car dealers, building material stores and gasoline stations, providing a reading that’s tied better to underlying consumer demand. Sales retreated at electronic stores, clothing stores, and personal care shops. Broadly, demand at retailers remained steady, indicating the consumer is still the economy’s key fuel source. Federal Reserve Chairman Jerome Powell said in congressional testimony this week that there’s no reason that a scenario of generally strong job growth and rising wages can’t go on.
- US business activity shrank in February for the first time since 2013 as the coronavirus hit supply chains and made firms hesitant to place orders, a warning sign that the outbreak is starting to dent the world’s largest economy. The IHS Markit purchasing manager’s index measuring composite output at factories and service providers fell by 3.7 points to 49.6, the lowest level since October 2013, when the US government shut down. Readings below 50 indicate contraction. It’s the first major piece of US economic data to show a sizable hit from the coronavirus, which economists have seen as generally cutting more into Asian countries’ growth. The stumble in the IHS Markit survey was led by service providers, whose new orders registered the first contraction in data going back to 2009, while manufacturing PMI fell to a six-month low of 50.8. Companies in both sectors noted reluctance among clients to place orders amid the global virus scare.
- US personal spending decelerated in January to a still-solid pace suggesting momentum among American consumers eased somewhat at the start of the year ahead of the coronavirus concerns. Personal spending, which accounts for about two-thirds of the economy, rose 0.2% from the prior month after an upwardly revised 0.4% gain in December. Personal income jumped 0.6%, the most in almost a year, on increases in employee compensation and social security benefits payments. One element supporting consumer strength is higher incomes, as companies offer higher pay in order to attract and retain workers in a tight labor market. Disposable income also climbed 0.6%, the most since December 2018, following a 0.1% gain in the prior period. The personal saving rate climbed to 7.9%, the most since April, from 7.5% the prior month.
- The Federal Reserve’s preferred core inflation gauge climbed 1.6% from a year earlier, missing forecasts and remaining shy of the Fed’s goal despite three interest-rate cuts last year. The broader personal consumption expenditures price gauge, which the Fed officially targets for 2% inflation, climbed 0.1% from the prior month and was up 1.7% from a year earlier, both missing estimates. The core PCE index, which excludes food and energy, increased at a 1.59% annualized rate over the past three months compared with 1.55% in the three months through December.
- Growing concerns over the spread of the coronavirus have rattled investors at home and abroad. European stock markets plunged on fears of negative economic impacts. Europe has seen outbreaks of the illness in Italy, Germany, France, Spain, and Great Britain. South Korea and Iran experienced a growing number of cases. Benchmark indexes such as the STOXX Europe 600, FTSE 100 and the DAX Performance Index (Germany’s benchmark index) have fallen noticeably since the end of January. Purchasing managers from several countries’ industries are warning of a slowdown in manufacturing. Japan’s gross domestic product showed that the economy contracted in the fourth quarter of 2019, with declines in consumer spending and investment. China’s GDP expanded at a rate of 6.0% in the fourth quarter and 6.1% for 2019 – the lowest in 29 years.
The impact from the coronavirus has been reflected in some recent economic reports and definitely in the stock market. March marks the first meeting of the Federal Open Market Committee since the end of January. Interest rates were unchanged at that time. However, the Fed has stated a willingness to cut rates if necessary due to the economic tumult caused by the coronavirus.
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