Stocks just experienced their first two-week losing streak since early October 2019 and their worst weekly decline since August 2019. The continued spread of the coronavirus has sparked much of the selling, but as the LPL strategists note, many factors were set in motion for some well-deserved pullback and market volatility.
Coronavirus fears spread
Global markets sold off hard the last week of January 2020, with China and other emerging markets taking the brunt of the selling. Although so far the fatality rate of the dangerous virus has been less than the SARS outbreak in 2003, the aggressive nature of how quickly this virus is spreading has caught many off guard. China now makes up 17% of global gross domestic product (GDP) compared to 4% of global GDP during the SARS outbreak, so shutting down the second-largest economy could have lasting impact on the global economy. Yet, as the LPL strategists discuss, in previous periods of epidemics and pandemics, equity markets have tended to take things in stride, and a few months later they’ve made up any losses.
After a huge year of equity gains in 2019 and a solid start in the first few weeks of 2020, one of the biggest worries we have is how excited investors are getting. From Barron’s sporting a Dow 30,000 cover and various sentiment indicators showing extreme greed, to put/call ratios near the lowest levels we’ve seen in years and near-term exchange-traded fund (ETF) flows showing huge inflows to equity funds, all of it has added up to some major worries for the LPL strategists. Remember, when everyone is excited, no one is left to buy. Think about a year ago: No one was bullish (well, LPL Research was, but it was lonely), and that helped spark a huge rally in 2019. Now we see what we think could be a mirror opposite.
Super bowls and January barometers
We end this week’s podcast with some playful discussion. The LPL strategists note that stocks historically have done much better when the NFC wins the Super Bowl. Given the AFC Kansas City Chiefs just won Super Bowl LIV, will the bulls help out in 2020?
Finally, “as goes January, so goes the year,” has been a popular investment adage. Given the S&P 500 Index was slightly lower in January 2020, does this mean trouble for the final 11 months of 2020? Well, here’s the good news: Stocks actually have done quite well over the past 20 years when the first month of the year has been lower, with a higher median return the final 11 months after January was in the red versus when stocks were in the green in January.
Tune in now
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References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
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This Research material was prepared by LPL Financial, LLC.
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