Anyone who went to bed last night thinking the market’s coronavirus fears had faded got a rude awakening this morning. Stocks fell sharply overseas and U.S. futures plunged after China reported thousands more cases and a larger death toll.
The bad news puts this week’s fast-paced rally into question as investors wondered if virus concerns might again quiet down the party Wall Street had been enjoying. We’ve talked about how the virus is going to be an overhang, and sadly, it still is. There’s nothing people can do except hunker down and, of course, watch their health.
After fading earlier this week, fear meters like bonds, gold, and volatility came back into favor today. The 10-year yield slipped below 1.6%, the Cboe Volatility Index (indexcboe:VXS) jumped above 15, and gold prices are firmer. Crude prices edged down toward $51 a barrel. A risk-off tone seems to be back in town.
The travel and leisure sector might be in focus after two days of recovery for many of those stocks. For instance, yesterday saw gains for retailers whose shares had been beaten down by coronavirus. PVH Corp /zigman2/quotes/208313660/composite PVH -2.64% —which owns brands like Tommy Hilfiger and Calvin Klein—rose more than 4%. Ralph Lauren Corp /zigman2/quotes/207257694/composite RL -8.52% was another big gainer. Cruise line and casino firms also made up ground. These stocks could be a good place to watch today for any rapid reaction to the new virus cases in China. RL, for instance, gave back all of its gains overnight.
Even before China reported these new virus numbers, it seemed possible that the market could be in for a late-week reckoning. We’ve said it before and will say it again: Things can’t go straight up forever. Virus or not, a three-day weekend is approaching, and the last two Fridays saw profit-taking as a big feature. Maybe these new cases could give some people an excuse to take profit a day early, but we’ll have to wait and see how big a factor that is.
All this isn’t to downplay the tragic human toll of the illness, but only to point out that investors might want to consider some caution as Friday approaches. That doesn’t mean run for cover, but it could be prudent to take special care and consider limiting the size of your trades today and tomorrow until things get a little more settled around what the new virus numbers might mean.
It’s possible we could learn more about how quickly it’s spreading over the next few days, hopefully by the time U.S. trading resumes next Tuesday after Monday’s President’s Day holiday. Any word on the pace of new cases is probably going to be sliced and diced pretty thoroughly by then. Remember, the spread had seemed to be slowing earlier this week.
The virus was bound to be discussed as China’s huge tech firm Alibaba Group Holding Ltd /zigman2/quotes/201948298/composite BABA -3.45% reported, and shares sank this morning despite the company having a solid quarter. Earnings and revenue topped Wall Street’s consensus views, but the CEO said coronavirus is a “black swan” event that presents “near-term challenges” to the company’s business and could have a “significant impact” on China. Those words might have spooked some investors.
In other company-related news, Tesla Inc /zigman2/quotes/203558040/composite TSLA -2.61% shares put on the brakes this morning when the company announced a $2 billion public offering of shares. Even with today’s losses, the stock remains dramatically higher than it was a few months ago, but anyone getting on this train is probably in for some bumps along the way.
PepsiCo, Inc. /zigman2/quotes/208744353/composite PEP +0.17% shares barely budged early Thursday as the company beat analysts’ earnings and revenue estimates but delivered an outlook that was a little light on the fizz. Projected earnings growth for 2020 was lower than analysts had expected.
The earnings beat goes on this afternoon as chipmaker Nvidia Corporation /zigman2/quotes/200467500/composite NVDA -1.75% and digital media firm Roku Inc /zigman2/quotes/205087179/composite ROKU -2.56% both report (see more on NVDA below).
Cisco Systems Inc. /zigman2/quotes/209509471/composite CSCO -4.34% managed to inch past analyst expectations for earnings and revenue when it opened the books after yesterday’s close, but the stock came under major pressure overnight. It’s been a bit of a head-scratcher, seeing CSCO up just slightly over the last year even as so many other Information Technology players just keep going up. The focus today appears less on CSCO beating analyst estimates and more on its sinking revenue and falling product orders. The company cited macroeconomic headwinds.
Data also was in the news this morning as weekly jobless claims looked sparkling at a low 205,000. Inflation numbers for January looked unremarkable with a 0.1% headline rise for the consumer price index.
Another reason to consider taking care and not going “all in” might be valuations. This latest surge pushed the forward price-to-earnings ratio (P/E) of the S&P 500 Index (indexsp:.INX) to 19.4 by mid-week. The 3.5% coronavirus-related selloff earlier this month briefly put the P/E back down near 18.5, and even that is historically on the high side. Now we’re back where we were before on valuation, making some analysts wonder if prices are justified by underlying fundamentals.
The good thing is that the “E” part of the equation is doing a little better than people thought it might. Earnings probably rose about 1.5% last quarter, according to research firm CFRA. Many analysts had initially expected Q4 results to be in the red. The bad news is that even with growth in Q4, full-year 2019 earnings growth would be just 1.3%, followed by what CFRA projects will be another quarter of 1.3% earnings growth in Q1. Those aren’t numbers to write home about.
It could get better after that, CFRA says, but the 6% earnings growth it projects for 2020 doesn’t necessarily solve the elevated P/E situation. Still, investors seem to be willing to let valuations hang out a little higher than normal in an environment where inflation and potential rate hikes just don’t appear to be in the picture. In addition, the U.S. economy continues to be arguably the best one on the block and consumers came out to shop during the holiday season. Consumer sentiment data due for release Friday morning loom large, as they’ll be some of the first to reflect any reaction to the virus.
CHART OF THE DAY: Eu-rosion. The euro dropped to its lowest level versus the dollar since May of 2017 Wednesday, as indicated by this chart of CME Euro Currency futures (/6E). Credit Suisse said this week it's expecting a 10 basis point cut by the European Central Bank in Q2. Meanwhile, in two days of congressional testimony, the Fed chairman struck an upbeat tone on the US economy, which the markets may have interpreted as a greater likelihood it will hold the line on rates this year. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Chips and China, Part Two: Earlier this week, we talked about why semiconductor companies might be partially immune to coronavirus. Problems in the China supply chain could cause chip shortages, raising prices for the end product and allowing the chip makers to benefit from higher prices even as they might see volume dip.
There’s another reason these firms might end up not suffering so much from the illness, and that has to do with last year’s trade war. Over the last two years, some chip companies started diversifying their supply chains into countries besides China as they worried about how tariffs might affect their China operations. They decided to protect themselves by spreading the wealth, so to speak. One unintended consequence might be that they now have a chance to get over the virus hump more easily because they don’t have as much China exposure. If the virus slows production in China, they can simply shift some of their output and supply chain into other countries.
Nvidia Results Up Next: An easy comparison can sure help a company’s earnings story. That might be the case for NVDA, which reports after the close today. Revenue is expected to increase for the first time in more than a year, MarketWatch reported, with sales driven by the data-center segment. Both Intel Corporation /zigman2/quotes/203649727/composite INTC -5.71% and Advanced Micro Devices, Inc. /zigman2/quotes/208144392/composite AMD -1.94% reported strength in data-center revenue in their most recent quarters. One worry for NVDA is its gaming business, which MarketWatch says might see a short-term headwind from coronavirus. Shares of NVDA have been on a roll lately, maybe a sign that investors remember the company has a history of beating Street estimates, especially on the bottom line. Another point maybe in NVDA’s favor is the recent cryptocurrency rally. The company’s graphics processing unit (GPU) is used in the cryptocurrency mining process. With shares up 73% from a year ago, one potential worry with earnings is that you can’t rule out the chance of some profit-taking after the news.
Dollar On a Roll: One aspect of U.S. economic strength is arguably the resilient U.S. dollar. After a brief slide below 97 in January, the dollar index climbed above 99 on Wednesday. That’s the first time it’s hit 99 since October, and it’s not necessarily the best news for multinational companies that have big markets overseas. A higher dollar makes dollar-denominated products more expensive for foreign buyers.
Looking at individual performances yesterday, you wouldn’t get the sense people are too worried about dollar strength. Companies with big overseas exposure like Nike Inc /zigman2/quotes/203439053/composite NKE -1.27% , Apple Inc /zigman2/quotes/202934861/composite AAPL -4.14% , and Caterpillar Inc. /zigman2/quotes/203434128/composite CAT -4.58% all rose sharply. That made the dollar look like background noise until this morning, when PEP said in its earnings release that foreign exchange poses a “headwind.”
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