Weekly Market Update (January 20 – January 24, 2020)

By Craig Fehr January 24, 2020

U.S. stocks finished lower for the week, taking a breather following the strong performance since the beginning of the year. Global markets underperformed on fears of the coronavirus outbreak in China spreading and its impact on the economy as the Chinese Lunar New Year holiday begins. Oil prices declined the most in a year as investors worried that the outbreak could result in lower demand for fuel. Nevertheless, the story is still developing, but past episodes of viral outbreaks around the world have not made a significant dent in economic and market performance. However, given the uninterrupted nature of the recent market rally, we think it's prudent for investors to expect a bumpier road ahead.

Too Far Too Fast? 

Timex watches had the famous slogan, "Takes a licking and keeps on ticking". That phrase may be applicable to the stock market of late as well.  While the market was off marginally last week, it's recent impressive run has included another 2% so far in 2020, with a return of 15% just since early October1.  As we look at this rally, two things are worth highlighting:

  1. The direction of the market makes perfect sense. A healthy consumer, a ceasefire in the U.S.-China trade war, recent signs of green shoots in the global economy and Fed policy keeping its weight on the gas pedal are all healthy ingredients for the market.
  2. But the speed and relentlessness of the rally warrants attention. Worries of a potential Coronavirus pandemic, military conflict with Iran and presidential impeachment proceedings top the list of issues that have been thrown at the market recently, none of which caused much of a flinch.  Stocks have risen on two-thirds of all days since the start of November and have only been down six days so far this year. Moreover, the market is up 13 of the past 16 weeks1. To be clear, none of the issues noted above are, in our view, catalysts for a material market downturn. The broad direction of the stock market is driven by economic, profit and interest rate conditions -- all of which remain supportive. So, from that perspective, the market appears to be behaving rather rationally lately. That said, our Spidey-senses start tingling when the market seems to whistle past even headline risks in uninterrupted fashion. Healthy trees grow, but not all at once and not to the sky. Importantly, we see little evidence of euphoria at the moment and we don't think this is setting the stage for a painful downturn. But we do think the market is exhibiting a bit of complacency recently, which makes it more vulnerable volatility ahead. 

Period

4-month gain

Next 1 month

Next 6 months

Oct. '19-Jan '20

15.0%

?

?

Jan. '19-Apr. '19

18.4%

-4.8%

3.5%

Oct. '17-Jan. '18

15.1%

-3.3%

-1.2%

Feb. '16-Jun '16

15.5%

0.7%

1.9%

Nov. '12-Mar. '13

15.3%

0.7%

8.7%

Nov. '11-Mar. '12

22.3%

-1.9%

28.1%

Source: Bloomberg, Edward Jones, S&P 500 price change. Indexes are unmanaged and cannot be invested in directly.  Past performance does not guarantee future results.

  • Sharp rallies often need a breather… The market has returned more than 250% over the past 10 years, with those gains coming more somewhat gradually as opposed to big bursts1.  That said, we have seen steep, steady rallies occasionally along the way.  The table above shows five previous instances since 2010 in which the stock market gained more than 15% in a four-month stretch1. These weren't setups for a collapse, but the market did frequently stop to catch its breath, with the following month failing to sustain the pace.   
  • …but not a vacation.  These types of rallies don't happen by accident. While momentum can periodically cause the market to get a bit ahead of itself, favorable longer-term tailwinds are usually at the heart of the run. That's the case at present, with this current rally sparked by positive economic readings that quelled last autumn's recession fears and proactive Fed rate cuts that boosted confidence in the expansion's durability. As an investor, consider 3 "P"s in your approach to the market's recent performance:
    • Positive: Bull markets often end with a bang, delivering strong gains in the final stage. But importantly, bull markets also end with recessions as the gains are unable to be sustained amid a contracting economy and falling corporate earnings. This decade-long bull market has experienced many pauses and pullbacks, but a growing economy supported rebounds and the broader path higher. We don't think a recession is approaching, meaning even if/when volatility returns, you can be positive in the broader outlook.
    • Prepared: We don't endeavor to predict short-term market moves, but we know even healthy markets have fits. Being prepared doesn’t mean exiting the market. Instead, we think realistic expectations and proactive adjustments can best help you navigate this market. We recommend an equity-fixed income allocation that's in line with long-term targets, so if the recent rally has pushed your portfolio to an overweight position in equities, consider rebalancing to align with your intended target. 
    • Panic: There's an old investing phrase, "No one ever made a dime panicking." The pieces are in place for the market to deliver a positive performance again this year, but when the path gets bumpier, make decisions aligned with your financial goals, not emotions or headlines. While not necessarily too far or fast, this market has come quite a ways in a short period. A good offense and defense can help long-term investors navigate both the ups and downs that may lay ahead.  

Craig Fehr, CFA
Investment Strategist

Source: 1. Bloomberg

Index Close Week YTD
Dow Jones Industrial Average 28,990 -1.2% 1.6%
S&P 500 Index 3,296 -1.0% 2.0%
NASDAQ 9,315

-0.8%

3.8%

MSCI EAFE* 2,036 -1.0% 0.0%
10-yr Treasury Yield 1.69% -0.1% -0.2%
Oil ($/bbl) $54.35 -7.2% -11.0%

Bonds

$113.81 0.7% 1.1%
Source: Morningstar, 01/17/2020. *4-day performance ending on Thursday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

The Week Ahead

Important economic data being released include new home sales on Monday, consumer confidence on Tuesday, the first Fed rate decision of the year on Wednesday, and fourth-quarter GDP on Thursday. On the corporate front, the earnings season will begin to heat up, with about 30% of the S&P 500 reporting fourth-quarter earnings2.

Source: 2. FactSet

Review last week's weekly market update.

Important Information

The Weekly Market Update is published every Friday, after market close.

Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against loss.

Dividends may be increased, decreased or eliminated at any time without notice.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

The content of this report is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.

All content of the Dow Jones Indexes © 2017 is proprietary to Dow Jones & Company, Inc.

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