Capital 19 Catch-Up

Suspicions over the accuracy of China’s coronavirus reporting failed to dampen stock buying last week. Nor did the rise of Bernie Sanders as the favourite in the fight for the Democratic nomination in the November Presidential elections. Both the Nasdaq and the S&P500 closed out the week at all-time highs, while the Dow stumbled in the Friday session, but closed only slightly lower than its own all-time high it hit on Thursday. But can the run continue?

The White House has become extremely doubtful of the coronavirus numbers being reported by China – who continue to fiddle with their protocols of reporting. They suspect the number of cases and the number of deaths are being held back by Chinese authorities, most likely as a way to circumvent panic. Despite this, they still say transparency has improved from previous outbreaks but would appreciate their offers of further assistance to be utilised by the Chinese regime.

Where the epidemic will go from here, and more importantly, from a stock market point of view, how much of an impact will it have on the economy is still up in the air at this point. In his speech to Congress last week Federal Reserve Chairman Jerome Powell said he was closely monitoring the situation, and any fallout to the US economy will start appearing shortly in the data. The good news, he said, is that the impact will be occurring at a time of relative strength in the economy.

The World Health Organisation (WHO) for their part are warning that we aren’t out of the woods just yet. Director-General Tedros Adhanom Ghebreyesus stated that although there looked to be a stabilising in the numbers last week the outbreak “could still go in any direction”, and the slowdown in the spread should be viewed with “extreme caution”.

That’s news to the stock market which continues to hit all-time highs as investors shrug off the coronavirus dangers. We’ve seen it all before with Sars, the avian flu, and the Zika virus. No need to panic. The same can’t be said of the bond market however, with yields tightening as more money flows into the relative safe haven. There’s a large number of investors out there who think the worst is yet to come. So, on the one hand, we’ve got the stock market forging ahead with a “nothing to see here” attitude, while the bond market is preparing itself for a hard and fast dose of volatility. Who’s going to come out on top?

Speaking of the “nothing to see here” vibe. Wall Street has done a pretty good job so far in ignoring the groundswell of public support rising up for left-leaning Democratic candidate Bernie Sanders. The Senator from Vermont has taken out the popular vote in both the Iowa caucus debacle and the New Hampshire primary to be sitting on top in a two way battle for delegates with South Bend, Indiana mayor Pete Buttigieg.

With constituencies in both Iowa and New Hampshire considered to be as “white” as a polar bear in a snowstorm, we now move into more racially diverse states where it is predicted that Sanders will have more of a following. It’s a worry for the Democratic centrists, who fear that with Mayor Pete, Amy Klobuchar, and Joe Biden all bidding for the same moderate voters, it will leave a clear run for Bernie to sweep the nomination. Especially if Elizabeth Warren, the other left-leaning candidate, drops out early.

So why does this matter to us as stock investors? It matters because Bernie Sanders is not a fan of Wall Street. Financial institutions, health insurance companies, and billionaires such as Amazon (AMZN) owner Jeff Bezos are all square in his crosshairs. His tax the rich and give to the poor ethos is directly opposed to the Trump tax cuts that big business has been pocketing during the latest Presidential term.

Many have disregarded the chances of a 78 year old socialist coming through and taking the Democratic nomination, let alone winning against Trump in November. But not many out there thought Trump could win the Republican nomination and then go on to win the Presidency either.  Mark my words, Sanders is a massive chance, and the stock market will get increasingly volatile if his successful run continues.

Did I mention that the stock market is at all-time highs? Earnings season has continued to be a big part of this. A few weeks ago we mentioned that expectations were for company profits to fall for the fourth quarter in a row. Yet with more than three-quarters of S&P500 companies having reported, and 72% beating expectations, it is looking increasingly likely that we will have our first positive earnings quarter since 2018.

PepsiCo (PEP), Alibaba (BABA), Applied Materials (AMAT), Expedia (EXPE), and Newell Brands (NWL)all managed to beat earnings expectations during the week. As did Nvidia (NVDA), a favourite of the Catch-Up, who yet again smashed earnings and jumped 7% in response.  Like Intel (INTC) just a few weeks ago, it was the data sector segment which impressed the most, with management suggesting there were even more profit increases to be had in the area in the near future. In a warning for the industry however, the chipmaker expects the coronavirus to impact somewhere in the region of $100 million in revenue in the next quarter.

Uber rival Lyft (LYFT) beat revenue expectations but missed on profit, falling 10.2% for the session. It also failed to provide a “timeline to profitability” which Uber had done in its earnings release, and which disappointed investors. United Armour (UA) was another that struggled, missing on both profit and revenue, as the once-popular clothing brand struggled to attract new customers. The sportswear retailer dropped 18% after the numbers were released, and after predicting the coronavirus would likely have a $50-$60 million impact on their bottom line in the 1st quarter of 2020.

The week ahead is a shortened week on Wall Street with markets closed tonight for Washington’s Birthday public holiday. The rest of the week will be filled with coronavirus reports coming out of China and potentially profit downgrades from the airlines who have been directly impacted by the travel ban. The minutes from the last FOMC meeting will be out on Wednesday, and we’ll also be seeing housing starts, building permits, existing home sales, and manufacturing data released.

On the earnings front, the big player for the week is Wal-Mart (WMT). Competitors have struggled so far this earnings season, mainly due to the fact that there were six fewer shopping days in the 2019 holiday season than in the previous year. The largest bricks and mortar retailer in the world is looking for earnings of $1.44 per share and revenue of $142.54 billion. We’ll also see earnings results from Herbalife (HLF), Groupon (GRPN), Norwegian Cruise Lines (NCLH), Domino’s Pizza (DPZ), DropBox (DBX), and Deere (DE).