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February 2020 Market & Economic Update

February 2020 Market & Economic Update

January began with a continuation of the upward momentum from the last couple of months of the year. But over the past week concerns about the Coronavirus in a Chinese province triggered some profit taking in stocks worldwide. Fear investments, like bonds and gold did well while trade growth investments like energy and materials declined.

 

As of 1/31/2020 Returns

US (S&P 500, Symbol: SPY)                                  Down 0.16%

The Dow Jones (Symbol: DIA)                              Down 1.00%

The NASDAQ Composite                                     Up 1.99%

Europe (Euro Stoxx 50, Symbol: FEZ)                   Down 4.10%

Emerging Markets (Symbol: EEM)                        Down 6.10%

Bonds (Total Bond Index, Symbol: BND)                Up 2.00%

Gold (Symbol: GLD)                                                Up 4.50%

(source: cnbc.com)

The decline in stocks did not come from the potential 5 risks we highlighted in the last update.

In fact interest rates declined further (a sign that institutional money is worried about a slowing US economy and little or no inflation).  When interest rates decline on existing bonds it means bonds were being purchased.

The quarantine measures that the Chinese government have enacted could lead to a slowing in the Chinese economy. The Chinese economy is the second largest in the world and it’s interlinked to ours and Europe and emerging market economies (like Brazil and Turkey and Indonesia to name a few).  This concern coupled with stock markets that had a very strong 2019 and into 2020 explains why last week had some selling.  It’s still too early to determine what kind of economic effect this health care crisis will cause. But this weekend the Chinese government announced monetary stimulus measures that are meant to aid their economy. So, while there could be an economic impact from the containment process of this virus it looks like it could be offset by market friendly measures by Chinese and potentially US central bankers.

This also coincides with the beginning of the Democratic presidential selection process.  As the process unfolds and we learn more about the winning candidates the markets could be under pressure. According to JP Morgan, the worst-case scenario for the market would be Sen. Sanders or his rival on the left, Sen. Warren, winning the White house, with a Democratic sweep of the House and Senate in November.  The best case, they contend, would be for Biden to gain the nomination and win the general election, with Republicans maintaining a hold of the Senate. The next best case would be the re-election of Pres. Trump, which would probably mean a more aggressive foreign and trade policy.

That said, corporate profit announcements over the past couple of weeks have been generally good. And the dividend yield on the S&P 500 is 1.75% while the yield on a 10-year US Treasury bond is down to 1.5% (source: cnbc.com), this differential historically favors stocks. Our opinion is that if the US economy does not go into recession, and we currently see a low chance of that, then stocks are likely to outperform over the next 12-18 months.

In the meantime, if you would like to schedule a review or call or meeting please let us know. We are ready to discuss your personal financial situation and if you have had any changes that might warrant that we take a different approach.

Sincerely,

Neal W. Mufti, CFP®                                                     Mike Iftaiha, CFP®
Managing Director                                                         Financial Advisor

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S&P 500: The S&P 500 is an unmanaged index comprised of 500 widely-held securities
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