Global markets continue to sink as the coronavirus spreads, reaching 28 countries in total so far. There are some silver linings, though, as the LPL strategists discuss positive fundamental news out of the U.S. and European economies. From earnings to leading indicators, the U.S. economy remains quite resilient.
Over the weekend, the outbreak continued to grow, as the number of cases in South Korea, Italy, Japan, and Iran all spiked. Cases in mainland China appear to have steadied, but there’s growing concern about the overall impact to the global economy. Right now, the immediate impact is on the Chinese economy. As the strategists discuss, it’s impossible to virtually shut down the second largest economy in the world without expecting to have some major fall out. In fact, at the beginning of January, the International Monetary Fund (IMF) cut China’s 2020 growth to 5.6% from 6%. We’re watching this situation very closely, but overall we continue to see a healthy U.S. economy, and we would view any weakness as an opportunity.
As fourth quarter earnings season wraps up, we are once again impressed by what corporate America had to say. Yes, earnings were up “only” 1-2% compared with the same quarter a year ago, but these earnings reports were much better than what was expected at the beginning of earnings season. As the LPL strategists discuss, the third quarter is appearing more and more like the trough for earnings. Energy was a big drag on earnings, and if we take out that group, overall earnings were actually up roughly 4%. Last, what companies had to say about the future was impressive, although the spread of the coronavirus outbreak over the past week has introduced some downside risk to the earnings outlook for 2020.
Although stocks sold off hard to kick off the week due to the outbreak, there are some positives to discuss. For starters, the Conference Board’s Leading Economic Index (LEI), a composite of leading data series, rose 0.8% month over month in January, ending a string of lethargic readings. The LEI rose 0.9% year over year, signaling a potential bottom in the series and pointing to economic growth. Globally, the Eurozone Flash Composite Purchasing Managers’ Index (PMI) unexpectedly jumped to a six-month high, while the United Kingdom manufacturing PMI increased the most in 10 months. Meanwhile, Japan has continued to struggle since the consumption tax went into effect late last year, as the Japanese manufacturing PMI shrank the fastest pace since 2012.
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