Monthly Market Insights from Bill Schiffman – February 2020
“Home is where the hatred is… home is nothing but pain… and it might not be such a bad idea… if I never went home again.”
The late Gil Scott-Heron wrote and performed these haunting lyrics in 1971. The song “Home is Where the Hatred Is” has been re-worked by many diverse artists, from Esther Philips to James Chance and the Contortions. It’s both a beautiful and incredibly sad song, and I urge you to sample it via YouTube.
The reason for my musical choice this month is that we ended January with plenty of angst and rancor. The United States may have been the epicenter, but world events showed that there was plenty of division to spread around.
The impeachment trial of President Donald Trump appears as though it will close later this week with a full acquittal. The episode has ended up to be little more than bad televised theater. Democrats bungled the proceedings from the outset, and Republicans stonewalled the information flow to achieve their desired end. Emotions ran high on both sides, and the network coverage spillover inflamed the atmosphere regardless of whose side one favored. The final result is that America didn’t win anything. The deep political divide in our country has only been exacerbated. President Trump’s power will only increase. Congress can now return to whatever it is that they normally do (or don’t do). The entire display was noxious, and it’s difficult to see how the United States can profit from it.
Not to be outdone, Britain left the European Union on Friday. “Brexit” has been a bone of contention across the pond for a couple years. It was originally approved by a similar contingent of voters that propelled President Trump into the White House. Since the vote, there has been “Bregret” about the imperative, but not enough to overturn the decision. Even within Britain, there is much dissension in the ranks. Scotland basically would like to secede from the motherland, and unity between Ireland and Northern Ireland on the matter appears impossible. We’ll have to see how this one plays out in the Eurozone, but it’s not exactly a happy affair for now.
In China, the rapid spread of the coronavirus has isolated that country. Like the SARS epidemic of 2002-3, it seems as though the Chinese government underestimated the strength and velocity of the health problem. The source of the virus, Wuhan (a city of 11 million), is quarantined. Now that the understandably muted Lunar New Year festivities have ended, Beijing workers are being urged to work remotely. Airlines have suspended travel into and out of China and Hong Kong. Coronavirus cases are now being seen in many countries, including eight as of this writing in the US. I flew back from Houston on Friday night, and one of the flight attendants donned a mask halfway through the trip (AFTER serving drinks and snacks!).
Since the alleged purpose of my monthly missives is to opine on the stock market, let’s move there. The coronavirus provides the perfect segue. Equities enjoyed a lovely run in the fourth quarter of 2019, and January started off in a promising way. From a charting and technical perspective, stocks looked overbought by the third week of last month. When these indicators arise, a temporary selloff often comes. The coronavirus news spread panic as well as the supposition that the Chinese economy would be negatively affected. Wall Street took its cue, and traders (human and machine alike) sold shares rather indiscriminately. The bottom line is that portfolios were slightly down in January, and the momentum would suggest that the slide isn’t over.
I did a bit of research on the market reaction to the beginning of SARS two decades ago. Stocks slid then, to a final trough of roughly 7% before the news flow allowed them to recover. Given the fact that Wall Street has been long overdue for a correction, the coronavirus is a perfect catalyst. It wouldn’t surprise me in the least if a similar slump didn’t occur here. Don’t panic… this is a normal occurrence for the market, even without the spur of an epidemic. We’ve been through many corrections together, and we’ll get through this one if it does indeed play out.
The bottom line for me is centered on one number – the yield of the ten year Treasury at 1.53%. Who is really going to invest over a decade to achieve a paltry return, albeit guaranteed? The dividend payout on the S & P 500 exceeds what government paper will pay, so isn’t it still logical to remain in equities? The corporate earnings cycle thus far has been more than decent, and inflation remains quite low. The US is still at relatively full employment. We’re nowhere near a recession at this juncture since GDP remains positive (a recession is defined as two consecutive quarters of negative GDP growth). As investors, we must remember to cut through the clutter of the news flow and concentrate on fundamentals. The impeachment saga has been meaningless for Wall Street. Brexit will take a while to evolve. The coronavirus scare will hopefully mirror what happened in the SARS cycle. Stay calm and breathe.
Tomorrow may give some of us another reason to remember the lyrics to this month’s song since the Iowa caucus will give us a first peek into President Trump’s Democratic challenger. If Sanders or Warren should win, markets might over-react to the downside. Again, remember that markets go down faster than they go up. My feeling is that the “dip” will be bought at some point since bond yields are so low.
Let’s end on a couple of positive notes – neither Punxsatawny Phil nor Buckeye Chuck saw his shadow this morning, so the groundhog indicator is for an early spring. Finally, yesterday, 02/02/2020, was the first palindromic day in 909 years. Talk about a long time between drinks!
Thanks as always for your continued trust and support. Our team of Kelley, RC, and Christie is here to help you through what may be a period of increased market volatility. Please feel free to e-mail or call with your comments. I look forward to hearing from you soon.
|The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.|
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