The market began on a high note on the first trading day of the year with the Dow closing at an all-time high of 28,868 on January 2nd. The momentum that began in October continued through the 17th of the month with a close on the Dow of 29,348. Crossing the 29,000 mark in January for the first time ever was a noteworthy event. By January 17th the Dow was up 2.84% for the year.
After the MLK holiday, the market began to pull back on news of the coronavirus in China. The third week of the month logged losses each day as the news from China worsened and a few cases of the virus were identified in the U.S. Volatility increased as the month drew to a close. By Friday, January 31st, fear gripped investors and the Dow fell over 550 points that day. All the January gains were wiped out and the Dow ended the month down -1%.
It is normal to expect a pull-back after the strong surge since October and there is usually a catalyst that changes the market direction. In this case the catalyst appears to be the coronavirus. The market does not like uncertainty and there is so much that is unknown about this event.
Stocks impacted the most are in the travel and retail sectors. Crude oil prices have also fallen in the anticipation of reduced travel due to the quarantine in China. While it is likely that China’s economy will suffer, the impact on the U.S. economy is expected to be minimal.
In the first four trading days of February the market has rebounded strongly recovering all the losses in the last two weeks of January. The Dow, the S&P 500 and the Nasdaq all three hit new highs.
Ultimately it is the economy and fundamentals of companies, not events, that determine the direction of the stock market. Corporate earnings in the 4th quarter are strong. Inflation and unemployment remain low. Low inflation means that real wages, that is wages net of inflation, are increasing at a higher than average rate. This is very good for lower wage workers.
When the Federal Reserve met in January it voted unanimously to hold short term interest rates. It has found a monetary policy that is not too hot and not too cold, a goldilocks approach if you will. It is unlikely we will see a change in short term rates before the November election. The Board needs to be apolitical and any change this close to a presidential election, whether it be up or down, could be viewed as trying to influence the outcome.
In an already strong economy, two long awaited trade agreements were signed last month. What is being called a “Phase One” agreement between the U.S and China was signed on January 15th and hopefully there will be more progress in 2020. The President signed the revised NAFTA into law on the 29th. Called the USMCA, it opens Canadian markets for American dairy farmers and includes incentives to manufacture cars in North America. Both are expected to positively impact the U.S. economy in the coming months.
More volatility should be expected as the coronavirus event plays out, but as of this writing, the economy and fundamentals remain strong and there is no reason for investors to panic.