Week in brief: February 7th

February 9, 2020

Following the Chief's 31-20 Super Bowl victory over the Forty Niners, we close out yet another football season. Leaving millions of red-blooded American (and foreign) football fans with no gridiron outlet for eight months. No pre-ordained ritual permitting them to block out the rest of the world while college and NFL games play out before them like visual manna from heaven.
The bright side? The opportunity to focus on other stimulants. Perhaps the newest le Carre novel. The stack of magazines on your desk. Some binge-worthy television. Or (gasp) even the threatened species once known as an afternoon with the family, Devoid of television, screens and other distractions. Or hell, even the stock market.
It's earnings season, baby!
While more than 110 million Americans tuned into the the previous Sunday night's grid-iron extravaganza, market observers noted that the stock market's uptrend remains intact despite the Wuhan coronavirus epidemic that has provide epic media fodder fare and wide.
Chinese stocks, which were closed last week for the Lunar New Year, tumbled upon reopening last week. But U.S. stocks did not. In fact, they rose. As investors shrugged off a deep plunge in Chinese financial markets and potential economic impacts of the worsening coronavirus epidemic. Even FANG stocks, with their heavy China exposure, moved higher.
But, given the nature of this growing global health issue, a rally doesn't translate to an all-clear. In fact, it might just be the lure to attract investors before the next drop. Because if we see the virus post 20 percent daily increases in both death toll and case numbers, any short term recovery becomes a dead-cat-bounce.
The Taiwan News last week ran a story claiming that Tencent had 'mistakenly' announced confirmed cases that were ten times higher than official data supplied by Beijing. In an age where fake news makes the search for truth a battle in itself, stories of toilet paper shortages in Hong Kong, food shortages in Wuhan and babies born with coronavirus via infected mothers are exactly the type of news about which President Xi Jinping worries.
Despite the continuing sense of optimism around the containment of the outbreak, there continues to be one itch we cannot scratch: the apparent disconnect between the visible Chinese policy response and the continuing optimism within the markets. Combine this with long-held skepticism surrounding Chinese data, and the real question becomes: are we right to be so confident? Would China really have ever let the U.S CDC get involved if they had everything under control?
It might not be time to run into stocks just yet, but there's a good chance that a buying opportunity presents itself. Because the global economy probably won't enter recession anytime soon. Any impact on the global economy will manifest through China's GDP and its contribution to global growth, as well as spillover effects on the rest of the world via trade and tourism. The coronavirus does imply some downside to near-term growth, but it should not derail the global recovery.
Time will tell. More below...
Q4 earnings season continues. Results have outperformed expectations thus far. Half of S&P 500 companies have reported. Three-quarters of reporting companies have beaten expectations, with aggregate earnings coming in six percent ahead of expectations, slightly better than recent quarters.
Earnings growth is great news. The S&P 500 currently trades at 18 times forward earnings, which isn't unreasonable. But equities can't rise in the absence of some positive development on the earnings front. Not after last year's remarkable 31-percent return for the S&P 500. A gain that was largely due to a rise in price rather than earnings growth.
Following the recent headline turmoil and equity growth, clients have wondered if it might be "time to peel back stock exposure." To which we are inclined to repeat a long-held mantra: do not fight the tape.
The market uptrend has come under pressure. Yet, the uptrend remains intact, and must be respected. Let's adhere to the heuristic provided by Occam's Razor, a problem-solving principle stating that the simplest solution tends to be best. Just because markets become temporarily nasty, that does not imply that a long-standing uptrend has been eradicated. It hasn't. It's simply under pressure. But until the tea leaves tell us that trend-change is afoot, we will adhere to current plans. Which have served us well for quite some time.
Which reminds me: This week has historically been one of the best of the year for chip stocks. If you're bullish, now might be the time to opportunistically add some to portfolios.
Now let's take a gander at the economy.
Evidence of strengthening economic fortunes has revealed an economy that -- despite last year's fears of an impending recession -- have bolstered most, if not all, areas of the nation. In fact, Fed Chairman Powell said this week in prepared testimony the U.S. economy is in a "very good place" and "there's no reason why the expansion can't continue."
And continue it has, as recent data reveal an economic tide that is lifting all boats amid a growing and dynamic economy heading into 2020.
Women recently overtook men to hold the majority of U.S. jobs for the first time in a decade. While employers added positions for a record 10th straight year. Women held 50.04 percent of jobs last month, surpassing men on payrolls by 109,000. While minority unemployment stands at its lowest-ever print.
Factory and manufacturing data has improved. Spending is up year over year, as household consumption continues to drive the economy. And Friday's private new jobs numbers blew past expectations. Consumers continue to spend while new jobs continue to come online? Reads like a formula for economic success. One that could provide an important buffer against future headwinds or an uptick in uncertainty. Like a viral outbreak.
As much as the economic data reveals, we'll also continue to watch the real-world, empirical evidence which lay all around us.
A-political, empirical evidence always trumps the more arbitrary, politically-tainted, circumstantial alternatives which so dominate broadcasts. Underscoring why we prefer to build empirical evidence into our economic outlooks. By observing "real-world" purchasing decisions being made in real time. Boat and recreational vehicle sales. Dinners at pricey steakhouses. Elective plastic surgery procedures. Crowd volumes in popular tourist destinations like Vegas, NYC, Miami and the nation's capitol. All good barometers of the economy. In aggregate, they provide an empirical glimpse into the marketplace at work. Into the data than can reveal how, where, when and why consumers are allocating their discretionary capital. And accordingly, what the economy may look like in the future based upon such viewable, real-world decisions.
Patriot's owner Robert Kraft likes to say, "The key to life is you try to see things other people can't see." Such visual economic evidence enables astute observers to do exactly that. Right now, we believe the evidence passes the "eye-test" and corroborates what the data says. Things remain solid. Providing reason for continuing optimism.
Still, the chance of a near-term pullback remains.
Technical analyst Ralph Acampora, a pioneer in the field of price and chart-based trading, recently told MarketWatch that he thinks the coronavirus fears are a catalyst for a market that had gotten too pricey and was due for a substantial pullback.
"The market itself was stretched, so we were begging for some kind of correction and this is the catalyst," he said. He is expecting that the stock market will face at least a 10 percent drop from its recent peak, which would meet the criteria for a bona fide correction held by most market technicians.
Regardless, Acampora continues to support equity investments in the midterm. "I'm not negative on the stock market, if you've got cash and are looking to get in this market, this is an opportunity."
Meanwhile, in the swamps of the nation's capital, the impeachment trial of President Trump concluded with an acquittal last week.
Elsewhere, we may soon come to pity the world's despots. Just when everything seemed to be going so well, life got messy.
China appeared poised to tighten its grip on Hong Kong last summer with the infamous extradition bill. That hasn't quite panned out. Not only have the protesters kept their movement alive in the face of relentless hostility from Beijing, they humiliated the Chinese Communist Party in local elections in November by taking majorities in 17 out of 18 district councils. While in Taiwan, Tsai Ing-wen, whose re-election prospects seemed doubtful last summer, recently swept to a landslide victory as voters embraced her party's determination to defend Taiwanese freedom from an increasingly menacing mainland.
In Venezuela, Maduro's thuggish regime had enjoyed some success in repressing Juan Guaidó, who is recognized as the legitimate president of Venezuela by more than 60 countries. But last month, regime pressure failed to keep the National Assembly in line and 100 of its 167 members defied Mr. Maduro. Choosing to support Mr. Guaidó's re-election as the assembly's president.
Nor have Tehran's attempts to gain greater regional hegemony gone smoothly. In Iraq, anti-Iranian protests shook up the political system late last year. Iraqi security forces and Iranian-backed militias killed hundreds of demonstrators but failed to quell protests in the strongly Shiite south against political corruption and Iranian influence. Lebanon has seen its own wave of protests also aimed at a corrupt political elite and Iranian influence.
In Iran itself, where authorities hoped the killing of Qasem Soleimani would unite ordinary Iranians behind the regime, the opposite has occurred. Waves of anti-government protests spread across the country as authorities first launched an awkward and unconvincing effort to cover up Iran's shooting down a Ukrainian passenger jet. Killing 176 people. Only to admit to the atrocity when the story began to crumble. Spontaneous demonstrations broke out in cities throughout Iran. With demonstrators chanting, "America is not our enemy" while ripping down posters of Soleimani, and calling for death to the supreme leader, Ayatollah Khamenei.
Friends of freedom can take heart that so many ordinary people remain willing to take great risks for liberty. But it is much too soon to break out the champagne. History tells us that most protest movements fail to take power and that even when despots fall, it's rarely a constitutional democracy that emerges. Still, the fight for freedom is hardly doomed. And brave men and women throughout the world continue to inspire us as the stand up to freedom-crushing tyrants and autocrats.
In politics, a slew of Democratic White House hopefuls have been in Iowa for the Caucuses. Iowa's a wonderful place. My father's side hails from lovely Davenport. Yet the scene these last two weeks has been something straight out of a Doonesbury cartoon. Culminating in last week's Caucus. Featuring all the remaining Democrats jockeying to challenge Trump.
However, Monday's Political-Palooza was no sooner officially concluded when the state's Democratic Party began to report delayed releases of the results due to non-clarified reporting inconsistencies. Representing big problems for the candidate-winnowing process. And the future of Iowa's "nation's-first" Caucus. Oh well. On to New Hampshire.
Finally, we highly recommend everyone read U.S. Attorney General William Barr's speech last week on the risks that China's 5G development poses to the U.S. He goes so far as to recommend the U.S. take a stake in Nokia or Ericsson in order to help the US maintain technological dominance. Giving up technology leadership, which the U.S. is in danger of doing, could fundamentally re-shape the world order within five years. We cannot remember the last time an American Attorney General gave a speech like this. Obviously, this topic has become critically important. Let's hope that western governments understand that and quickly mobilize to counter the threat.
Onward and upward!

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