by Shawn Narancich, CFA
Executive Vice President of Research
Rebound Redux
In stark contrast to the fear-based selling that enveloped markets a week ago, stocks bounced back with a vengeance in the first week of February. As casinos shut in Macau and blue-chip companies like Nike and Apple warned of a hit to their businesses from the spread of coronavirus, the global epidemic has failed to derail the bull market in U.S. stocks. Notwithstanding today’s pullback, the S&P 500 rose 3 percent this week and touched a new record high despite additional coronavirus infections. In addition to the tragic human toll being inflicted, the global economy will most certainly be impacted in the first quarter. But as pharmaceutical and biotechnology companies scramble to find a cure, equity investors seem to be implying that human innovation will prevail, preventing a materially worse, longer-term impact.
At Your Service
Economic reports out this week also provided investors encouragement. After being in recession since last summer, U.S. manufacturing bounced back in January, with the PMI moving back into expansionary territory. And despite the lingering pullback in manufacturing employment portrayed in the chart below, the January jobs report was overwhelmingly positive. Net non-farm payrolls expanded by 225,000 last month, easily outpacing expectations, while accompanied by modest wage gains of just 3.1 percent sure to please those fearing higher inflation from a tight labor market. As we’ve been stating in our 2020 Investment Outlook events, the U.S. economy is much more beholden to the service side of the ledger than it used to be. As the jobs chart portrays, new job creation is being driven by industries such as healthcare, education, leisure and travel and professional services.
A Smoother Ride
Clearly demonstrating the notion that it’s not your father’s economy, the following chart shows the transition of the labor market away from manufacturing jobs. As we posit in our Outlook presentations, the inventory swings associated with traditional manufacturing — those that traditionally contributed to boom-and-bust periods —are less impactful given manufacturing’s increasingly small share of the employment base and overall economy.
Recipe for Success
Meanwhile, fourth quarter earnings season is transitioning to later innings. Hundreds of additional companies reported this week, with the plurality once again delivering better than expected results. With nearly two-thirds of the S&P 500 now reported, estimated earnings growth for the fourth quarter has improved – from an estimated 2 percent contraction before earnings season to what now is approaching a 1 percent increase. Technology earnings led by cloud computing, software security and semiconductor applications have powered ahead, putting the sector in pole position for sector performance so far this year.
Waiting on a Friend
Over the final few weeks, investor attention will shift to retailers, traditionally the last group of companies to report by virtue of their January fiscal year-ends. While consensus estimates overall still look too high to us, earnings forecasts for the S&P 500 have moved closer to our working estimate of 4-6 percent earnings growth in 2020. Since we aren’t presuming a repeat of the multiple expansion witnessed last year, we believe earnings need to rise to support further gains in equities.
Our Takeaways from the Week
Stocks rebounded dramatically amid a continued onslaught of earnings and despite the human tragedy and economic drag of coronavirus
The January jobs report illustrates the labor market’s transition to a service-based economy