An Epidemic Exit Plan
Your portfolio survived the first test of the coronavirus fears. Is now a good time to count your blessings and take some risk off the table?
Contributed by Doug Walters , Max Berkovich , , , Connor Gaffney
U.S. stocks shrugged off fears that the spread of coronavirus could pose a risk to economic growth and gained back the losses from the past two weeks. Global growth will be impacted in the near-term by shutting down cities, travel restrictions, and other trade logistical complications. But there will be pent up demand to fill in the medium term, and some products (medical equipment and pharmaceuticals to name a couple obvious examples), are likely experiencing a boost in demand. The final economic toll may not be lasting, particularly on the global stage.
So how should investors prepare for this uncertainty? If you have a well-diversified portfolio, then you already have! As investment managers, it is not our job to predict the future, but rather to prepare for it. Market shocks, like pandemics, can create opportunities upon which a diversified portfolio is ready to pounce. Through regular rebalancing, we will be trimming positions that have outperformed and adding to new opportunities that the market creates.
What we will not be doing is market timing. Is now a good time to exit the market? No. Not because coronavirus is not serious, not because equities are not on the high of their valuation range, and not because we believe stocks can not decline significantly. Rather, it is not a good time to exit, because the future is unknown, and exiting is more likely to mean missing out on the next leg up than it is missing market declines. A better strategy is to stay invested at a level of risk that is appropriate for you and let your diversified portfolio naturally take advantage of market highs and lows. We call this “investing,” as opposed to “gambling.”
Friday’s payroll data showed unemployment at 3.6% with 225,000 jobs created in January, beating the Street consensus of 161,500 jobs. Monthly jobs are volatile. Smoothing out across the year, jobs created continues the steady decline it has been on since early 2015. This is probably more due to the challenge of adding new jobs when unemployment is so low than it is to a weakening economy.
Headlines This Week
- The U.S. added 225,000 jobs in January, beating the Street consensus of 161,500 jobs.
- The December payrolls were revised higher by 5,000 jobs, adding more strength to a robust U.S. economy.
- Unemployment stood at 3.6% while growth in average wages remained flat.
- The above expectations number was attributed to mild weather in January.
- Over 65% of companies in the S&P 500 index reported quarterly earnings so far.
- Earnings have grown by 2.32%, with Tech, Financials, Healthcare, and Communication Services sectors the most significant contributors.
- Around 70% of S&P 500 companies have reported a positive EPS surprise, and approximately 65% have reported a positive revenue surprise.
State of the Union
- President Donald Trump delivered his third State of the Union address, discussing his record of employment economic growth.
- The President pledged to protect Social Security and warned against socialism.
- The President was also acquitted of both of his impeachment charges the following day in the Senate.
- While China is battling Coronavirus, the U.S. was able to detect and contain the virus from spreading quickly.
- Although more cases are expected in the U.S. and other developed nations, the World Health Organization is not worried about an escalated spread like in Wuhan, China.
- Interruption in commerce in China and disruption of global trade will pressure global growth in the near-term, but the lasting impact is still in question.
The Week Ahead
Cisco (CSCO), CVS Health (CVS), Expedia (EXPE), and PepsiCo (PEP) report earnings next week.
- The former Aetna CEO was recently announced to be leaving the CVS board, possibly hinting at difficulties in the integration process of CVS and Aetna. Color on the integration will be paramount.
- Expedia could encounter a difficult period ahead as the fear and unknown surrounding the coronavirus continues to play out and hit leisure travel the hardest. Also, a management shake-up in the previous quarter will be scrutinized.
- Fed Chairman Jerome Powell will be attending his semi-annual congressional hearing on Tuesday and Wednesday next week.
- Investors will be eager to hear his opinion on the economic outlook and could provide some color around any future Fed decisions.
- While the Chairman gets grilled, other Fed officials will be out on the speech circuit as well.
Economic Highlights include
- The CPI (ex Food & Energy) figures for January will be released on Thursday. A slight bump is expected this month.
- The JOLTS Report (Job Openings and Labor Turnover Survey) will add some insight into the hot labor market.
- The Retail Sales report and the University of Michigan Consumer Sentiment Index will shed light on the state of the U.S. consumer.
- The European Union will unveil its growth forecast as well as reveal its Gross Domestic Product (GDP) for the 4th quarter of 2019.
Stock Highlights from Max
Stocks had a notably good week, with all sectors in the green. The least green this week is the energy sector. Even an OPEC production cut was not enough to boost the ailing sector. Defensive sectors like Utilities, REITs, and Consumer Staples were also laggards. The best sector was Technology, but Health Care was not far behind thanks to earnings from…
- McKesson Corp. (MCK), the distributor of pharmaceuticals and medical supplies, topped expectations by a significant margin. Sales were over 5% higher compared to the past year. Guidance was solid as well, but what truly drove investor enthusiasm was not earnings related. The company seemed to indicate that, while still in the works, a settlement with various State Attorneys General in the opioid-related lawsuits were going well. Furthermore, indications from Washington D.C. suggested that lawmakers were waffling on drug price regulations. With the light at the end of the tunnel on these two major headwinds, investors finally see smooth sailing ahead, at least for now. Speaking of smooth sailing…
- Cognizant Technology Solutions Corp. (CTSH) also beat expectations. The technology consulting and outsourcing company boosted its dividend by 10% as well as confirming a stable outlook for the remainder of the fiscal year. Previous reports indicated weakness in the financial services and health care sectors, so year-over-year revenue growth in both was welcome news. Earlier in the week the company also announced an acquisition of Code Zero, a privately held cloud computing consultant and implementation company. The addition will boost the company’s ability to help customers rapidly configure, price, and quote complex deals for clients. Financial details of the transaction were not disclosed. Other earnings season highlights include…
- The Walt Disney Co. (DIS) also topped estimates but was facing tough comparisons going into the report. The company did wow investors with 26.5 Million Disney Plus subscribers, crushing the low-20 Million predictions. Media Networks growth of 24% over the year and a 106% increase in Studio revenue was also pleasant. Lastly…
- Alphabet, Inc. (GOOG, GOOGL) beat on earnings but was a little light on revenue. The company changed some revenue disclosures, which added unnecessary noise to the quarter.
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