January 2020 Market Commentary: The U.S. Market Enjoys Living on an Island of Its Own While the Rest of the World Deals with the Fallout over Coronavirus

Data Source: Bloomberg

January 2020 Highlights:

  • Global stocks posted negative returns (MSCI All-Country World Index or ACWI down 1.1%), with the U.S. ending nearly flat (S&P 500 0.0%), outperforming the other major regions (MSCI Japan, Europe, and Emerging Markets down 1.4%, 2.5%, and 4.7%, respectively), which felt the negative impact from the coronavirus scare more than the U.S.
  • Earlier in the month, U.S. stocks continued their strong rally from the fourth quarter over prospects of a negotiated Phase 1 U.S. / China trade deal, signs of renewed strength in China’s economy seen at the end of the prior year, and optimism over a post-Brexit trade arrangement between the U.K. and China.
  • The coronavirus outbreak in the Hubei province of China led to a massive sell-off in global risk-based assets such as cyclical equities and commodities while contributing to a major rally in safe haven assets such as U.S. Treasuries, gold, and interest-rate sensitive equities.
  • The near-term impact from coronavirus will certainly be negative, but eventually investors will seek to discount the longer-term impact.  Will the Chinese economy benefit from the lagged effects of 2019 government and monetary stimulus? 
  • Within the U.S. markets, U.S. small caps underperformed large caps and value underperformed growth by a sizeable margin as investor appetite for high growth remains unabated.  S&P Small Cap returned -4.0% vs. 0.0% for the S&P 500 while S&P Pure Value returned -6.1% vs. 0.8% for Pure Growth. 
  • Safe haven sectors such as utilities and real estate benefited from the late month volatility while growth sectors such as technology and communications dominated traditional cyclicals and financials.
  • Among factors, Momentum and Minimum Volatility outperformed High Quality, Value and High Dividend.  Momentum is capturing the high growth and minimum volatility segments of the market both of which have outperformed over the past year.
  • Fixed income posted a solid month as the 10-Year Treasury Yield settled at 1.51% (down from 1.91% at the beginning of January).  The U.S. Bloomberg/Barclays Aggregate Index returned 1.9% for the month. High yield gave back its intramonth gains as the coronavirus impacted the credit markets (mostly energy-issued debt due to the sell-off in commodities).  Emerging market debt underperformed alongside equities. 
  • Commodities were hit the hardest from the coronavirus scare returning -10.8% for the month.  Real estate and Precious Metals posted positive returns as both benefited from the risk-off sentiment and lower yields. 
  • With respect to commonly referenced fixed income signals on U.S. economic growth prospects, the risk-off response is consistent with a negative growth impact, but not nearly as dire as what was priced in over 2019’s fears of a trade war escalation.

To view the full commentary, click here.

By: Benjamin Lavine