On the latest edition of Market Week in Review, Senior Portfolio Manager Megan Roach and Research Analyst Brian Yadao discussed the latest coronavirus developments as well as recently released European macroeconomic data. They also chatted about U.S. Federal Reserve (the Fed) Chairman Jerome Powell’s testimony before Congress and provided an update on the fourth-quarter earnings season.
Coronavirus cases rise as countries weigh stimulus-response
The week of Feb. 10 was a bit hectic on the coronavirus front, Roach said, beginning with the hope that the outbreak had stabilized and that businesses across Asia would soon resume normal operations. However, everything changed with China’s Feb. 13 announcement that a revision in how the virus is diagnosed had resulted in an additional 15,000 cases. “The news was a little hard to digest, as it brought the number of cases worldwide to over 65,000,” Roach explained, adding that markets initially sold off, before recovering as the day progressed.
At the moment, markets are attempting to weigh how long the outbreak will persist, as well as what kind of impact the virus will have on the global economy, she said. “The expectation is that, in order to reduce the magnitude and duration of a detrimental economic impact, many countries around the world will ramp up fiscal and monetary stimulus measures,” Roach stated. How successful this collective stimulus will be is a question for markets over the next several weeks and months, she added.
Could tepid inflation bring the Fed back into action?
Shifting gears to the latest macroeconomic data, Roach said that fourth-quarter GDP (gross domestic product) in the UK came in flat, while industrial production in the eurozone sank by 2.1%. “Neither of these numbers were particularly positive,” she noted.
On the U.S. side, the latest inflation numbers continued to paint a picture of very muted pricing pressure, Roach said. “For 2019 overall, the core personal consumption expenditures (PCE) price index—the Fed’s preferred measured of inflation—increased at a rate of approximately 1.6%, which falls short of the central bank’s 2% target,” she explained.
Fed Chair Jerome Powell, in his semi-annual testimony to the U.S. Congress on Feb. 11-12, noted that the central bank is paying close attention to the potential impacts of coronavirus on the global economy. While Roach and the team of Russell Investments strategists’ base-case scenario remains that the Fed will keep interest rates on hold this year, she said a potential reduction in borrowing costs is not out of the question. “Between the coronavirus outbreak, muted inflation and the Fed’s upcoming strategic review, the possibility of a 2020 rate cut is perhaps a bit more likely than originally thought,” Roach remarked.
Q4earnings season takeaways
Turning to the fourth-quarter earnings season, Roach said that over 85% of S&P 500 companies have now reported. “Generally speaking, the season has been a positive one, with many companies beating expectations,” she noted, adding that the financial, healthcare, utility and tech sectors have done particularly well. The industrial and energy sectors, however, charted negative year-over-year growth, Roach said.
“The energy sector, in particular, has been going through a rough patch,” she noted, explaining that in addition to dismal earnings reports, the coronavirus outbreak is expected to negatively impact global energy demand. Roach said the closures of businesses and factories in China due to the virus will result in a surplus of oil—despite production cuts already enacted by OPEC (the Organization of the Petroleum Exporting Countries) and its partners. Additional negative impacts are expected in the transportation, leisure and restaurant industries in China, she noted, due to quarantines across the country.
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