The U.S. market has been in a mood as of late, even as strong earnings results like Amazon’s roll in.
The S&P 500 fell more than 1%, with the other two major U.S indexes also down considerably.
Here is what is driving stocks down and what to watch next.
W.H.O has declared the coronavirus a global emergency, with the death toll rising and the virus spreading to Great Britain and the U.S.
The U.S. has issued a level four warning, the most grave warning that can be issued.
Goldman Sachs said the oronavirus could bring China’s GDP down by 0.4 percentage points. The expected impact on the U.S. economy is between extremely minimal and nonexistent, as the disease has barely spread, although that assessment is subject to change, depending on how quickly health bodies can stomp out the virus.
But U.S. airline and travel companies are impacted, as are U.S. companies with strong China exposure, like Starbucks, Dominoes, Nike and Canada Goose. Those stocks are all down more than 3% in the past few days.
It’s sending conflicting signals.
Fourth quarter consumer spending in the U.S. increased just 1.8, a marked deceleration over Q3 and Q2, which showed growth rates of 3.2% and 4%, respectively. Consumer spend represents roughly 70% of U.S. GDP and if the country is to avoid recession, it will need the consumer.
But the holiday quarter was strong and Amazon beat revenue estimates ($87.4 billion v. estimates of $86.03 billion) Thursday, as its one-day and same-day shipping is showing the initiative can reaccelerate growth in the global e-commerce market.
“Consumer spending cooled in Q4, which is somewhat eyebrow raising,” said Mike Loewengart, vice president of investment strategy at E*Trade. “It doesn’t exactly jibe with what we’ve heard from retail mainstays during earnings season.”
Others are less concerned. The consumer data “is concerning, but it is backward looking,” Jim Carney, founder and CEO of Parplus Partners told TheStreet. "It’s going to ebb and flow. I’m not seeing any major warning signs yet.”
Caterpillar, one of the globe’s largest economic bellwethers, missed revenue estimates.
The construction machinery and equipment manufacturer reported quarterly revenue of $13.14 billion, missing analyst estimates of $13.4 billion.
Management guided for earnings per share in all of 2020 of $8.50 to $10.00, missing estimates of $10.56.
Management said that customers are hesitant to buy equipment in volume because of global economic uncertainty. For the U.S. and some European nations, manufacturing activity has ben contracting on a year-over-year basis since August 2019.
What to Watch Next
Expect continued volatility.
As a result of the virus, "we’re going have some chop [volatility] in the next few weeks while we find out what’s happening,” said Carney." I think we have 4 pretty nerve-wracking weeks.”
Many strategists have been looking for a pullback on account of higher-than-historical valuations in a late cycle economy. The issue of the coronavirus, while many expect it to be sorted out and stomped out relatively soon, isn’t yet near a resolution.
Carney said, "everyone has had a god run and just selling a little bit as a precaution totally makes sense.”
He says it’s likely that shorter-term traders are selling. Long-term investors may be more incentivized to stay invested, as the economy isn’t close to running at negative growth, meaning that when earnings multiples fall back, the bull market can continue for some period of time.
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