With one eye on China and the other on Washington, investors continue to send stocks higher ahead of Fed Chair Jerome Powell’s testimony to Congress Tuesday.
Even though coronavirus remains a huge factor, there appears to be growing confidence in the market that China—the epicenter of the illness—is doing a decent job containing it. That doesn’t mean things can’t get worse, but the number of new reported cases is slowing, according to the latest data. This might help explain why most Asian markets rose Tuesday and U.S. stocks built on Monday’s gains in pre-market trading.
That said, coronavirus and other factors helped send Under Armour /zigman2/quotes/204420722/composite UAA -4.14% shares got smacked this morning. The stock fell more than 15% in pre-market trading after UAA reported a Q4 loss and said sales will fall in 2020. Revenue and earnings missed analysts’ estimates, and UAA is just trying to find its way. Like some other companies reporting recently, UAA cited coronavirus as one factor hurting sales in Q1.
On just about every earnings call now, investors might want to listen for coronavirus updates. It’s like tariffs last year, a theme that nearly every executive gets asked to address. If companies start lowering their guidance based on the outbreak, analysts might have to start pulling back their own estimates for overall earnings growth in Q1.
That said, Q4 earnings season approaches the finish line with a little more muscle. Last Friday, FactSet forecast 0.7% earnings growth in Q4, up from its original estimate for a 1.7% decline. Expected revenue growth of 3.5% is also slightly better than the firm originally thought. These still aren’t great results by any stretch of the imagination, and coronavirus could take a bite out of Q1 numbers. So it’s probably too early to put a lot of optimism into the earnings picture.
Earnings are kind of light this afternoon, but Wednesday morning brings CVS Health /zigman2/quotes/209664499/composite CVS -1.56% and Trivago /zigman2/quotes/205613957/composite TRVG +1.07% , followed that afternoon by Cisco /zigman2/quotes/209509471/composite CSCO -1.70% and MGM Resorts /zigman2/quotes/209932643/composite MGM -3.41% .
There’s more deal news today, with shares of Sprint surging more than 60% after The Wall Street Journal reported that its merger with T-Mobile U.S. /zigman2/quotes/204659678/composite TMUS -0.92% will be approved by a federal judge. These are the third and fourth largest U.S. wireless carriers.
Some of the defensive metrics remain elevated, but they indicate slightly less fear this morning. The 10-year yield climbed just a touch, and crude is back above $50 a barrel. Volatility eased, with the Cboe Volatility Index (VIX) tipping below 15. Still, there’s a struggle right now between the surging stock market and this sense of caution (see more below).
After Monday’s nice little rally, Fed Chair Jerome Powell steps to the podium today to take Q&A from Congress. Generally, the Fed has sounded more optimistic about the economy lately, and seems content to stay on the sidelines with rates. Powell would probably have to change his tone in a pretty big way to have much of a market impact today. There was nothing in his pre-testimony statement released early Tuesday to shake things up too much. The Fed is watching coronavirus closely, Powell said, and the big risk is China slowing down. That’s not surprising to hear.
While rate policy, economic growth prospects and the possible impact of coronavirus all could end up being front and center, other topics might also come up. For instance, consider listening for anything Powell says about U.S. debt, which continues to grow and has a chance to threaten all-time highs on a percentage basis in coming years, according to some analysts.
Powell might also discuss the potential economic impact of Boeing Co /zigman2/quotes/208579720/composite BA -4.81% shutting down 737 MAX production last month. Many economists think the BA situation combined with coronavirus could make for some rough sledding this quarter in U.S. economic growth.
There’s also concern about how overseas economies might be doing, even beyond China. For example, a lot of people got spooked last week when Germany reported soft industrial orders data for December. What does Powell think of all this and its potential impact on the U.S., and does he see any signs of the Fed having to adjust policy if things get worse? Is he encouraged by recent stronger U.S. data?
If you haven’t already noticed, there’s a kind of tug-of-war going on in the markets, and it would be hard to find a better example than Monday. The cyclical Information Technology sector helped lead a rally on Wall Street even as the defensive unit gathered strength on the field amid gains in bonds and gold.
The 10-year Treasury yield stayed below 1.6%. Crude oil lost ground, falling below $50 a barrel in another sign of possible demand worries before clawing back above $50 this morning.
This seems counterintuitive. If everyone’s so cautious about coronavirus, why would tech stocks be climbing? Is the stock market getting ahead of itself without enough people thinking about the risks, or are the bond and gold markets just not seeing what stock traders see?
First, it’s possible that semiconductor stocks—which helped lead the parade Monday with big gains for Nvidia /zigman2/quotes/200467500/composite NVDA +0.33% and Advanced Micro Devices /zigman2/quotes/208144392/composite AMD -0.88% —could actually be getting a lift from the virus. One school of thought says even though the virus might hurt these companies’ production chains in China, the resulting lower output could lead to higher chip prices which could potentially offset any losses from production issues.