Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
From Politics and Pandemics to Postings and Predictions … and More Politics
This week, the market began to shift its attention from concerns about Presidential impeachment and the Coronavirus (nCov) pandemic to fourth quarter 2019 earnings and the 2020 outlooks that companies will be issuing over the next several weeks – as well as the 2020 election season. Global monetary stimulus continues unabated. Broadly, companies will have to talk about impacts to their first quarter and full year 2020 outlooks as they relate to nCov. There is no question that the virus is having a tremendous impact on the world’s second largest economy. We will see China PPI and CPI data on Sunday night, and perhaps we will begin to get a sense of the real impact this “black swan” event is having, as well as any effects of stimulus from the Chinese government.
The fact that the Chinese economy has nearly ground to a halt has created incredible volatility in the commodities markets. Crude (WTI) closed the week down 2.2 percent, and is desperately trying to hang on to the psychologically important $50 level. Natural gas closed the week up 50 basis points. Although OPEC, and in particular Saudi, has been pushing for an additional 600,000 barrels per day of production cuts because of nCov, they have been met with pushback from Russia, which favors a “wait and see” approach regarding actual demand impact from the virus. Additionally, we expect that domestic shale production will begin to decline as well productivity peaks and producers are forced to maintain capital discipline and live within cash flow. This should put a floor under pricing despite concerns around a dramatic slowdown in China.
Energy stocks, though very volatile, managed to close the week in positive territory. The SPDR S&P Oil and Gas Exploration and Development Index was up 26 basis points, and the Van Eck Oil Services Index was up 2.2 percent. Copper closed the week up 3 percent, but is still down 7.1 percent year to date. We are hearing that copper smelters are declaring force majeure as a direct result of nCov, and there are quarantines in several cities in copper refining areas. Gold has been holding steady between $1550 and $1600, but was off 1 percent for the week. The HUI NYSE Arca Gold Bugs Index was off 3.44 percent as there has been a rotation out of the yellow metal as a safe haven and into risk assets. There seems to be no abating in bullish sentiment in the domestic equity markets.
Defensive stocks continue to fare well as investors chase yield, and valuations generally remain rich in these areas. Still, for the most part, fundamentals continue to have positive momentum. US-listed REITS in general do not have much exposure to nCov, though there may be some impact to mall traffic as a result of people being cautious about being in public areas. The DJ Equity REIT Total Return Index was up 1.6 percent for the week, but there was a lot of variance around subsectors. Infrastructure was weighed down by energy infrastructure. The Alerian MLP ETF (made up of energy infrastructure names) was off 12 basis points. However, the ProShares Global Infrastructure Index was up 93 basis points, and non-energy infrastructure continues to outperform. The Dow Jones Utilities average was off 72 basis points for the week, but remains up 6.1 percent for the year. These consistent, predictable dividend payers have seen an incredible run and full valuations.
We thank you for your continued interest and support, and look forward to reviewing the MAPS strategy fourth quarter of 2019 with you this coming Thursday.
Chief Executive Officer