Remaining bullish as virus scare likely overblown
Even bulls like us have been surprised at the stock market’s run since early October. A setback was inevitable, and the coronavirus appears to be the excuse. Until last week, the S&P 500 was up 15% off its early October lows. While such moves aren’t that uncommon, the longer they run, the more the weaker hands tend to get pulled in—hands that are more apt to panic and run at a sudden, unexpected negative headline. Coronavirus, anyone? But of note, excluding this latest advance, the S&P has had 16 10+% run-ups, with intermittent declines of no more than 2-3%, since this latest up-cycle began more than a decade ago. And of those 16 runs, 10 experienced an average 10% correction soon after, leading us to think a 5-10% pullback could be in the offing in the next few months. Is it underway now? We don’t think so, primarily for three reasons:
- The 24/7 headlines-driven hysteria over the coronavirus doesn’t seem to fit the reality of its impact. While we know nothing more than anyone else, we doubt it’s a fundamentals-changing force on even a 6-month view. The mortality rate, so far, is running much lower than the similar rates for SAARS-infected patients. Some drug combinations appear to be having a positive impact. The spread so far outside of Wuhan seems limited. And previous versions of these “incurable” flus eventually died out on their own once the flu season ended. As for flu season, here’s some perspective: an average 32,000 Americans die every year from the common flu. Once the market realizes this is more a reaction than a signal, we wouldn’t be surprised if it resumes its climb.
- Fourth-quarter earnings reporting season has been going fine, actually ahead of very low expectations. We have some big reports this week that could have a broader impact, but generally it appears the market is looking through the earnings soft patch we’re now in to a rebound ahead driven by several important factors we’ve previously highlighted: the bottoming of the manufacturing cycle; a likely global trade bounce on improved confidence following the U.S.-China trade war truce and a Brexit resolution; and the Fed remaining on hold. The Fed is done for the year, and the market knows it. Fed Chair Powell would make a complete fool of himself if he quickly reversed course again after his Q4 2018 overtightening mistake. Plus, as the year progresses, he’ll find it harder and harder to react to new data as the November presidential election nears.
- Q1 economic data is similarly getting a bit of a hall pass, due to a number of factors causing the consensus GDP growth for the quarter to be quite low (below 2%). These include the last impacts of the 15-month-old global manufacturing recession, for which year-over-year comparisons will soon turn positive; the impact of the Boeing shutdown, which will soon reverse; and the GM strike, which is now over. For the remainder of the year, we think there’s almost nothing but upside relative to the market consensus of 2-2.4% growth. Federated expects back-half growth of 2.9% growth, but even our own work suggests a much higher number—perhaps as high as 3.5%. Key drivers include the longer-term investment impacts of the Trump corporate tax cuts as they start kicking in; broadly higher corporate confidence following the China trade war truce and signing of the United States-Mexico-Canada Agreement; the turbo boost that should come from the re-acceleration of the global manufacturing cycle; liquidity continuing to be pushed into markets by central banks that have eased further; and the declining uncertainty around forward policy as the November election outcome becomes clearer.
All told, we are holding to our 3,500 forecast on the S&P by year-end and think another 10% upside move is possible in November/December if Trump wins the election and markets price in the higher long-term economic growth that would ensue from his pro-growth policies. We remain tilted toward cyclical and value names, as we think that side of the market will lead the next run, particularly off a near-term correction should we get it. In our PRISM® moderate growth stock-bond models, we are remaining at 50% of our maximum equity overweight—substantial but with room to add if a correction of 5% or more unfolds. As for the coronavirus, we think it’ll prove more short-lived than debilitating for the market.