American Money: Equities Remain the Place to Be

By David Lee Smith, Ph.D

We’re now more than halfway through the second month of a new year and decade. And as you obviously know, the year 2020 has emerged with both ever-stronger economic trends and political turmoil in the U.S., along with a somewhat chaotic situation globally. As such, if you’ll simply tap me on the shoulder and tell me how our upcoming presidential election will turn out, along with when the expanding coronavirus will be curtailed, I’ll tell you all you’ll need to know about the direction in which our markets are likely to head during the remainder of this year…and beyond.

We don’t appear to be on the verge of a significant market correction. While stocks are probably close to fully priced for now, equities seemingly remain the best place to park your shekels.

So far, so good

So let’s start with what we know about the new year. The nation’s labor markets continued their growth during January, tacking on another 225,000 jobs and retaining their 3.6% unemployment rate, which most economists tag as full employment. The job additions were more than 40% higher than had been anticipated by the economic seers. And beyond that, last week’s Bureau of Labor Statistics release added 5,000 and 2,000 jobs to the previously reported totals for November and December, respectively.

Then there is the preliminary metric for real gross domestic product for the fourth quarter of 2019. While a more accurate number will be released on February 27, 2020, an advance number constituting 2.1% growth during the quarter has been released by the Bureau of Economic Analysis. Were that number to stand later this month—in a release based on more complete data—it would be identical to the growth level for the third quarter of 2019. At the same time, it would dwarf the GDP growth rate of just over 1.0% reported for the final quarter of 2018.

The still-spreading coronavirus

At this point in the still new year, the largest concern for the global and U.S. economies involves the expanding coronavirus, which is ransacking China and slowly involving much of the rest of the world. Dr. Willy Shih of the Harvard Business School was recently interviewed by The Harvard Gazette regarding the advancing malady. Shih believes that the virus could be the biggest event affecting the global economy during 2020. As he is quoted as saying, “I don’t think people have fully appreciated what the impact is going to be because it occurred during the Lunar New Year break, and many companies that have supply chains or rely on products coming out of China had already planned for the disruption.”

One of the viruses’ major fallouts has already occurred in the crude oil markets, which took their first real hit earlier this month. Given the sharp reduction in demand from China, the Brent futures demand curve has been flipped into what is called “cantango,” a circumstance in which prices for later delivery are higher than closer-in levels.

Clearly one of the viruses’ major fallouts has already occurred in the crude oil markets, which took their first real hit earlier this month. Indeed, given the sharp reduction in demand from China (potentially as much as four million barrels per day), the Brent futures demand curve has been flipped into what is called “cantango,” a circumstance in which prices for later delivery are higher than closer-in levels.

As such, some international crude trading units are reportedly renting storage tanks from Korea National Oil Corporation (KNOC). The obvious objective is a stockpile of ready oil availability for distribution once the coronavirus has been conquered and increased demand resume. In the meantime, both OPEC and Goldman Sachs have chopped their crude price targets substantially. In Goldman’s case, that reduction amounts to $10 a barrel from the first quarter through the end of the year.

Continued expansion for equities

But what is all this likely to mean for the ongoing health of the U.S. equities markets? As you probably know by now, I frequently turn to my colleague and fellow economist George Parks for his insights in this arena. As he has noted recently:

“Macroeconomic data suggest a continuation of slow expansion. GDP continues to be driven by the consumer; retail sales were up again in January and sentiment remains near multi-year highs. Government spending continues to be helpful, with fiscal year-to-date spending having driven the deficit up by 25%.”

And bearing down on the market vis-à-vis traditional performance trends, George says “Historically, February is a so-so month. March is generally good, and the first quarter frequently comes in as the second strongest of the year. Election years tend to be mediocre for stocks. And the year after an outstanding performance year like 2019 tends to be good ones.”

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The bottom line

There you have it. While anything is possible in our hyper-partisan nation—and amid global circumstances that have numerous countries struggling—we nevertheless don’t appear to be on the verge of a significant market correction. And while the coronavirus could increase its weight on our own economy before it is controlled, dampening crude prices should serve as something of a counterweight to that effect. So, while stocks are probably close to fully priced for now, equities seemingly remain the best place to park your shekels.

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