Broker Check

The Path to Further Uncertainty

| February 25, 2020
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We have been using the term ‘uncertainty’ a lot lately and it appears that the on-going roller coaster of news stemming from the coronavirus may cause us to continue using that term over the next few months. Internally, the term uncertainty signifies events where we’re not capable of quantifying the risk nature to a significantly confident degree and, as a result, we must remain grounded in our already established risk management process. We’ve learned of numerous supply chain disruptions stemming from China that may impact business activity domestically, a notion that we knew would occur, yet its depth remains questionable. One of the most prominent companies in the U.S. (Apple Inc.) announced that the efforts of the Chinese government to curtail the virus, which involves the closure of many manufacturing facilities, could have a material impact to their business. Many economists viewed the announcement from Apple as the starting point for further announcements in the forthcoming quarterly earnings season. The extent of the potential damage, however, remains by far the most uncertain piece of the puzzle at this point. Post President Trump’s election, many companies sought varying supply chain resources outside of mainland China, mainly through Taiwan, the Philippines, and even domestically. The extent of such potential hedges by U.S. companies may prove beneficial, or at least minimally detrimental. We’ll know more through the eyes of the next earnings season. Whatever the outcomes may be, however, none of this changes the rhetoric tied to the current business cycle and the need for it to eventually end before a new cycle may begin. We expect the coronavirus to be blamed for any such developments largely because it is an easy target. This became evident during the week when commentary from the Federal Reserve cited the virus as a potential risk to economic bumps down the road. The Fed failed to confidently quantify the risk, which, to us, it means it’s an ultimate uncertainty, not a true quantifiable risk that should guide market participation decisions.

Shifting to other news during the week, we learned that the Empire manufacturing index surged more than had been anticipated in February. The index tracks manufacturing activity in New York State and is one of the key factors in calculating the national manufacturing growth index. We were encouraged to see the upside when considering the lagging growth in the sector over the past three months. Recent trends appear optimistic. On the housing front, we learned during the week that January building permits surpassed estimates to the upside while January housing starts declined. The downside was minimal relative to expectations, showcasing once more that the resilience of the housing market remains intact. Sentiment data from the University of Michigan last week indicated that the number of people who think now is a good time to buy a home has surged to the highest level since October 2017. The share of individuals within that group that cited low mortgage rates as the primary catalyst is the highest since late 2016. From an objective standpoint, it’s difficult to make a strong argument against housing at this point. Our commentaries over the past three months have indicated such a stance and we believe it to remain steadfast through at least the first half of 2020. The likelihood of restrictive monetary policy by the Federal Reserve is not something we foresee on the horizon, a notion that may act as an ongoing catalyst for housing strength.

Global equity markets failed to gain traction throughout the week as the FTSE All World equity index lost -1.24%. Domestically, the Standard & Poor’s (S&P) 500 closed the week lower by -1.22%. On the fixed income front, the Bloomberg Barclays Aggregate Index gained 0.57% for the week.

Edison Byzyka, CFA – Chief Investment Officer


Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.

All return data sourced from Bloomberg.  All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations. 

Small Business Optimism sourced through NFIB.  Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan. 

Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. 

Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.

FTSE All-World index series is a stock market index that covers over 3,100 companies in 47 countries. It is calculated and published by the FTSE Group, a wholly owned subsidiary of the London Stock Exchange and which originated as a joint venture between the Financial Times and the London Stock Exchange.

Past performance does not guarantee future results.


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