Market Decline Driven By A Panic Narrative

If there is one factor most disappointing about the coronavirus (COVID-19) outbreak, it is the panic narrative that seems to have overtaken a more rational narrative. This panic narrative is certainly contributing to the negative equity market reaction. In a tongue and cheek Saturday MarketWatch comment by Tom Lee, founder of Fundstrat Global Advisors, he notes one of the factors impacting the market may be investor concern of, "A meteor or alien invasion to end global existence has been spotted but its arrival is unknown (or a virus pandemic.)"

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Equity Market Sentiment Moving To An 'Extreme Fear' Level

The coronavirus, Covid-19, has triggered the recent decline in the equity market, specifically the S&P 500 Index. The Index is down 8.3% from its February 18 high with six percentage points of the decline occurring in the last two days. In spite of the recent weakness, the S&P 500 Index remains up 17% since the beginning of 2018. Within the S&P 500 Index though, more than 125 stocks are down more the 25% from their 52-week high, potentially providing some individual stock opportunities for investors.

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Current Market Similar To 1950's & 1980's Bull Market

I have noted in earlier posts beginning in 2016 (here and here) that the current equity market track resembles the bull market of the 1950's and 1980's. Those earlier articles noted policy similarities currently in place similar to policies pursed in those earlier decades, like tax cuts, infrastructure spending and more. As the below chart shows, the bull market that began in 2013 is tracking closely to that of the 1980's and projected to meet the 1950's & 1980's markets in a year or so.

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Simply Too Much Brick And Mortar Retail Space

As I often note when commenting about consumer related data, the consumer is important due to the fact they account for 70% of economic activity in the U.S. With the current economic cycle the longest on record, the consumer continues to show strength and remain in good financial shape. And given a strong consumer it may seem surprising that retail bankruptcies continue at a pretty high pace. Earlier this week Pier 1 Imports (PIRRQ) filed for bankruptcy and this will likely not be the last retailer to face financial headwinds. The following link from CB Insights Research Briefs details 81 retail bankruptcies since 2015.

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Positive Consumer And Business Sentiment Creating A Tailwind For Future Economic Activity

One area that remains favorable is the confidence of the consumer and small business owner. In this week's release of the NFIB small business Optimism Index, optimism rose 1.6 points to 104.3. The survey notes six of the ten components rose, two were unchanged and only two declined. Small business owners' sales and earnings expectations improved significantly, sales up seven points and earnings trends up five points. With respect to the consumer, Friday's University of Michigan Consumer Sentiment Index rose 1.1 points to 100.9. The report noted this level is near the expansion peak reading of 101.4 reached in March 2018. Also important, is the "Expectations Index, the main gauge of future economic conditions, rose to 92.6, also its second highest level in this long expansion."

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Declining Job Openings Occurring From A High Level

In Tuesday's release of the Job Opening and Labor Turnover Survey (JOLTS) job openings declined 364,000 to 6.4 million. This is a decline in openings from a high level of 7.6 million reached in November 2018. The blue line in the below chart represents hires in December and this line continues to trend higher at a fairly steady pace. In other words the pace of hiring has not slowed.

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S&P 500 Earnings Growth In An Uptrend

The strong return achieved by the S&P 500 Index in 2019, up 31.5%, occurred in an environment where earnings growth was nearly flat, i.e., up 1.7%. This flat rate of growth in earnings was below analyst expectations at the beginning of 2019. At that time I/B/E/S data from Refinitiv projected 2019 S&P 500 earnings to be up 7.2%. Consequently, the market's strong return in 2019 was driven almost entirely by the increase in the market's price to earnings ratio (P/E.), i.e., multiple expansion. The below chart displays the breakdown of the 2019 market return with the P/E ratio expansion noted by the blue shading on the bar chart.

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"Buy The Dip" Supported By Economic And Earnings Data

On Friday, January 31, the S&P 500 Index fell 1.77% resulting in the year to date return for the month of January equaling a negative .16%. That Friday decline meant the Index's return was down 3.22% from the year's high. One common phrase that describes investor behavior of late is "buy the dip." Last week's market action, up four days in a row until Friday's decline, is evidence that this "buy the dip" mentality remains a characteristic of the current bull market.

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