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Stocks are lower amid virus headlines

Market participants remain focused on the latest coronavirus news coming out of Asia this morning. The 1.8% jump in the Shanghai Composite Index overnight, following Wednesday’s rally to another fresh record high for the S&P 500 Index, reflects some level of optimism toward containment, in our view.

Meanwhile, last night’s Democratic presidential candidate debate is also garnering its fair share of the news cycle.

Aggressive China response.

China again changed the way it diagnoses infections which complicates analysis, but the Hubei province, where the virus originated, reported a drop in the number of new cases even as more people have tragically lost their lives and a small handful of cases have been reported in Japan and South Korea. From an economic and market perspective, China’s response has been aggressive, including interest rate cuts, tax breaks, and technology assistance to limit supply chain disruptions, limiting the market impact—and more policy actions are anticipated. A basket of U.S. stocks with the most revenue exposure to China compiled by Strategas Research Partners has outperformed the S&P 500 month to date, while the MSCI China Index has returned more than 7%–both encouraging signs.

Japan may be headed for another recession. 

We don’t talk a lot about the Japanese economy, but it matters for global investors. Japan’s weight in the MSCI EAFE Index is 24%, well above the next biggest country, the UK, at 16%. After the Japanese economy contracted by 6.3% annualized in the fourth quarter, the virus outbreak brings recession into play. The muted growth outlook makes it difficult to upgrade our view of developed international equities currently despite signs of economic stabilization that had emerged pre-outbreak in Europe and Asia.

Fed re-evaluating how it targets inflation. 

In the minutes to its January policy meeting, the Federal Reserve (Fed) shared some on-going discussions about how it may create greater flexibility around its inflation target. We take this to be another positive sign of the Fed’s more pragmatic approach to policy under Fed Chair Jerome Powell’s leadership.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.