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Strategic Insights

Volume 9, Edition 3 | January 20 - January 24, 2020

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Stocks Going Viral

Doug_Walters Doug Walters | Articles

Read Time: 4:00 min

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Stocks fell as investors contemplated the potential impact of the new coronavirus. Does a viral outbreak have the ability to infect investor sentiment?

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko ,

U.S. stocks slipped this week, with the pullback widely blamed on Novel Coronavirus concerns. However, given the recent run, investors were likely looking for any excuse to take a breather. Should investors be concerned about the potential for a pandemic? Probably not. If the past is any indication, virus pandemics pose much more risk to human health than investor portfolios. In the short term, travel-related stocks (e.g., airlines, casinos, hotels, etc.) will be the first to be hit. In the long run, we cannot point to an example where a modern pandemic has caused lasting damage to portfolios.

60%

Market Return During a Pandemic

The new coronavirus outbreak is often compared to SARS (also a coronavirus), which, in 2002 and 2003, infected around 8,000 and is blamed for the death of almost 800. The scare lasted about six months. Initially, stocks slipped but recovered those initial losses well before the outbreak ended. Perhaps a more extreme example is the 2009 flu pandemic. That virus impacted up to 20% of the global population, and tragically resulted in the death of hundreds of thousands. From the recognition of the virus (early 2009) to the declared end of the pandemic (mid-2010), U.S. stocks were up nearly 50%, and by the end of 2010 were up over 60%. For diversified long-term investors, any weakness that results from these awful diseases has the potential to create buying opportunities.

Headlines This Week

Goin’ Viral

  • The Center for Disease Control and Prevention (CDC) has confirmed a second U.S. patient with the coronavirus after a Chicago woman returned from Wuhan, China.
  • The CDC is actively monitoring 63 other potential cases in 22 different states.
  • They believe the immediate risk to the U.S. public is low at this time, but the situation is evolving rapidly.

Year of the Rat

  • China’s Lunar New Year will begin this Saturday. The celebration can last nearly a month, with people traveling all around the country.
  • Chinese banks and stock markets are closed until January 30.
  • The coronavirus will heavily impact this year’s celebration with travel and consumer spending hit the hardest.

Re-tooling

  • The European Central Bank’s new President, Christine Lagarde, launched a review of all tools used to control monetary policy.
  • Lagarde wants to make sure that the ECB is doing all it can after a prolonged failure to stimulate growth and inflation in the region.

In Davos 2020

  • A legendary investor, billionaire, and founder of the world’s biggest hedge fund Bridgewater Associates – Ray Dalio, said: “Cash is trash.”  Under current market conditions, Ray sees the bull run for stocks to continue.
  • Dalio also noted that there is still a lot of money parked in cash, which can help fuel the bull run or soften a significant pullback.
  • Dalio wasn’t the only one making waves. JP Morgan’s CEO had an opinion on socialism, “most state-owned enterprises don’t do a particularly good job.” He also added, “you look around the world, and they become corrupt over time.”
  • The newest global celebrity, former comedian/actor turned Ukrainian President, offered up a policy where a “nanny” would be assigned to global companies in his county. This one had nothing to do with child care. The “nanny” would be a multilingual representative that will help navigate the Ukrainian bureaucracy.

The Week Ahead

A large number of our portfolio companies report earnings next week:  Anthem (ANTM), Apple (AAPL), Caterpillar (CAT), Chevron (CVX), Church & Dwight (CHD), Facebook (FB), Honeywell International (HON), Lam Research (LRCX), Microsoft (MSFT), Mondelez (MDLZ), Pfizer (PFE), Phillips 66 (PSX), Boeing (BA), Truist Financial (TFC), United Technologies (UTX), Verizon (VZ), and Visa (V).

  • Apple and Microsoft will be the hot ticket after the run the two companies had in 2019. Still, Lam Research is probably a more important report as the company will give us a good look at the semiconductor business cycle.
  • Boeing will also grab a lot of attention as its 737 Max plane continues to garner negative headlines and remains grounded longer than initially expected.

The long-delayed Brexit deadline is finally here.

  • The United Kingdom is scheduled to leave the European Union on January 31st.
  • The law will be ratified in Brussels next Wednesday, with EU members approving the deal in writing on Thursday.
  • The transition period is expected to last through the end of the year.

The U.S. Federal Reserve releases its interest rate decision next week.

  • The overwhelming majority of experts see the Fed leaving rates unchanged.
  • There is early speculation that rates may need to be cut in the second half of 2020.
  • The preliminary figures for Q4 GDP are expected on Friday and could influence investors’ opinions on the future interest rate direction.

The Bank of England will also release its own interest rate decision next week.

  • The market is deadlocked around a 50/50 chance of the central bank cutting rates next week.

Stock Highlights from Max

Earnings All-Stars

Markets were spooked by coronavirus enough to overshadow earnings releases. The Energy sector notched yet another awful week. The Technology sector was the bright star though, thanks mostly to….

800px-Intel-logo.svg

  • Intel Corp. (INTC) reported a strong quarter boosted by robust results from the Data Center segment, where “hyperscale cloud providers” helped boost results there 19% year-over-year. Revenue in the quarter was 8% higher than a year ago. Intel boosted its dividend by 4.8% to a $1.32 annual payout and guided for $5 per share earnings for the full year 2020 to sweeten the results. The good news was well-received as fears of market share losses to competitor Advanced Micro Devices, Inc. (AMD) have pressured the stock for several quarters. Another star this week was…

MT Logo

  • M&T Bancorp (MTB) was a standout in the financials when it reported a blowout quarter (blowout by big bank results standards). M&T beat earnings expectations by $0.16 per share. The bank was able to contribute over $1 Billion of net interest income on a net interest margin of 3.64%. Net interest margin is the difference between the bank’s cost of funds and interest it charges on what it lends out. Both numbers declined from the previous quarter and last year, but so have interest rates. The bank indicated loan growth came from commercial and real estate loans. Not all earnings results were positive…

Travelers Logo

  • The Travelers Companies Inc. (TRV) reported what looked like a solid quarter initially, but markets were quick to look under the hood. The beat was driven by lower catastrophic losses for the property and casualty insurer than the prior year. In fact, the company missed expectations on net insurance premiums earned, which were only 4.3% higher from last year. Also, the combined ratio, a measure used in the insurance industry, which takes claims-related losses and general expenses and divides them by premiums collected, came higher than last year. Another report on the wrong side of the column…

Fastenal Logo

  • Fastenal Co. (FAST) reported results that matched expectations on earnings, but sales figures were a little light. The supplier of industrial products did raise its dividend by 13.6% to an annual payout of $1 per share

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