As 2020 began, market expectations were positive. We expected longer-term interest rates to rise and that the upside momentum in stocks would continue—barring a catalyst to spark a reversal in overly optimistic investor sentiment.
Well, the coronavirus epidemic did just that, resulting in a quick sell-off in stocks in late January. Although stocks quickly reversed and surged to new highs—amid expectations that the outbreak would peak and central banks would step in to support growth—10-year Treasury yields fell and have only marginally recovered. We have since reduced our upside outlook for rates, which is an important component of our Sector Views research process.
However, at this point we believe the global recovery simply may be on hold until later in the year, if the historical pattern of market response to epidemics holds true. Typically, stocks have experienced a short-term dip followed by the continuation of the market’s upward trend.
Meanwhile, the Democratic primary, where the moderates are pitted against the liberals, is affecting the relative performance of the health care sector. All candidates have endorsed the idea of the federal government taking a larger role in health care, whether by building on the Affordable Care Act or instituting a single-payer, national health insurance program.
Bottom line, we’re monitoring the impact of the ongoing uncertainty, but the fundamental underpinnings of our sector calls remain in place. At least for the time being, we’re not making any changes to our sector ratings. However, here are some of the issues that are affecting sectors:
Coronavirus may have an impact on sector performance
Many companies potentially could be affected by coronavirus (COVID-19), whose epicenter is an important manufacturing region of China. However, with the exception of the Materials and Energy sectors—which have seen sharp market declines year to date—the market impact so far has been mostly limited to industries within sectors that source their inputs from or sell their goods and services to China.
For example, we haven’t seen a broad impact on the Information Technology sector. However, within the Technology sector, industries such as electronic equipment and components, communications and some of the semiconductor companies have seen sharp market weakness. Integrated circuits, liquid-crystal display (LCD) components, automotive components, industrial machinery, air freight, luxury goods, oil and gas and chemicals are among the list of products and services flowing into and out of China that are likely to be affected the most.
Industries including energy equipment/services and auto components have lagged this year
Source: SCFR, Bloomberg, as of 2/17/2020 Past performance is no guarantee of future results.