January 2020 Monthly Market Review

Investor sentiment remained positive in the early weeks of January as the broad gains experienced in 2019 carried over into the new year. However, equity markets peaked around January 17th after a second death was reported in Wuhan, China―the epicenter of the coronavirus outbreak.  The virus spread to other countries and by the end of the month the number of reported cases surpassed those of the 2003 SARS outbreak.  While the loss of life is tragic and the ultimate scope of the outbreak in terms of size and length is unclear, at this point, the coronavirus appears less lethal and severe compared to other recent respiratory viruses.  By month-end, the World Health Organization had not declared the outbreak to be a pandemic.  From a capital market perspective, the outbreak will impact China’s first quarter GDP, which will likely affect global growth and potentially lead to further market volatility.

Risk assets, including non-U.S. developed and emerging equity markets, sold off during the month.  In addition, energy and other commodities were weak.  Rising risk aversion led to demand for safe haven investments which helped foster rallies in safe haven assets. U.S. equity markets largely remained resilient.  The recovery of equity markets and other risk assets will depend on a number of factors.  When events similar to the coronavirus outbreak occurred in the past, markets rebounded quickly, creating buying opportunities.

In January, the U.S. equity market, as represented by the Russell 3000 Index, was nearly flat despite several spikes in volatility associated with coronavirus news flow.  However, a three-year trend of growth dominating value continued, as the Russell 3000 Growth Index’s 2.0% gain was well ahead of the 2.4% loss for the Russell 3000 Value Index.  Four of the Russell 3000 Index constituents (Apple, Microsoft, Amazon, and Alphabet) were each up over 5% in January, and contributed nearly 100 bps to index gains. Combined with Facebook, these five stocks accounted for more than 15% of index assets―the largest concentration of the top five index stocks in more than 20 years.  Despite China’s key role in the supply chain for these companies, all were relatively insulated from the effects of the coronavirus outbreak.  However, developed and emerging markets were unable to avoid the impact of coronavirus fears.

Non-U.S. developed market equities, as represented by the MSCI EAFE Index, fell 2.1% in USD terms.  Emerging market equities fared worse, falling 4.7% in USD terms.  After a brief rebound in early January following phase one of a U.S./China trade deal, China (−4.8% USD) was among the worst performers, as were other large Asian markets such as Korea (−5.3% USD) and Taiwan (−4.7% USD).  In particular, a slowdown in demand from consumer- and industrial-oriented segments of the markets such as airlines, travel and leisure, and luxury goods retailers, are expected to weigh on growth as the coronavirus limited China’s consumer spending during the Lunar New Year holiday period.  Chinese markets were closed in the final trading days of the month in observance of the holiday, so the impact was not felt until after month-end.   Hong Kong’s market reopened on January 29th and fell almost 6% in the days that followed.  Meanwhile, the mainland market remained closed until  February 3rd given uncertainty around the severity of the outbreak.  On the first trading day following the holiday, China’s local Shanghai (−7.7% USD) and Shenzhen (−8.4% USD) markets experienced steep declines.

As the world’s largest consumer of crude oil, China’s consumption can have a dramatic effect on energy markets as evidenced by the drop in consumption as a result of the coronavirus outbreak.  Rising infection rates, new travel restrictions, and dampened domestic demand appear to have had a material impact on both the price of Brent crude (−14.2%) and natural gas (−12.5%).  At 1 million barrels per day, China’s domestic travel industry represents 1% of daily global crude consumption, which slowed dramatically in the second half of the month.  Any medium- or longer-term impact will clearly hinge on the scale and duration of the outbreak.  Easing tensions between the U.S. and Iran and higher than expected U.S. inventories also lowered prices.  Organization of the Petroleum Exporting Countries and Russia are reportedly considering additional production cuts of 500,000 barrels per day to help stabilize prices.

Energy equities (−8.2%) lagged other sectors/markets on lower commodity prices and weaker earnings/expected earnings.  In particular, the sustained drop in natural gas prices has caused increasing stress for gas-focused U.S. companies.  In 2018 and 2019 natural gas prices declined from $3.00/MMBtu to below $1.85/MMBtu, forcing a number of bankruptcies and lowering earnings for companies with greater gas exposures.  Chevron reported a $6.6 billion loss to close the month due to a onetime $10 billion writedown primarily related to a large shale gas position in Appalachia.

As previously noted, the sell-off in a number of risk asset markets led to a greater demand for safety.  The 10-year Treasury yield fell 40 bps to 1.52%, which in turn contributed to the 6.9% gain of long U.S. Treasuries during the month.  Global sovereign debt returned 2.0% in local currencies and gold rallied 4.2% to $1,582.90 per ounce.  The USD appreciated against all developed and EM currencies aside from the currencies of a handful of countries that showed modest gains, such as the Swiss franc (+0.5%), Hong Kong dollar (+0.4%), Japanese yen (+0.3%), Indonesian rupiah (+1.7%), and the Egyptian pound (+1.6%).

Indices referenced are unmanaged and cannot be invested in directly.  Index returns do not reflect any investment management fees or transaction expenses. This report is intended for informational purposes only; it does not constitute an offer, nor does it invite anyone to make an offer to buy or sell securities.  Information herein has been obtained from third-party sources that are believed to be reliable; however, the accuracy of the data is not guaranteed and may not have been independently verified. The content of this report is current as of the date indicated and is subject to change without notice.  It does not take into account the specific investment objectives, financial situations, or needs of individual or institutional investors.   All commentary contained within is the opinion of Prime Buchholz and intended solely for our clients. Unless otherwise noted, FactSet was the source for data used in this report. Some statements in this report that are not historical facts are forward-looking statements based on current expectations of future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Past performance is not an indication of future results.