It is impossible to predict the future but investors can’t help trying: the new year filled my inbox with reports playing on the theme of “20/20 vision”. The fallacy of perfect foresight lasted a mere two weeks until the scale of the coronavirus outbreak in China became widely known and wiped out all gains made in equity markets earlier that month.
In December I was concerned that markets were getting ahead of themselves, given that the US-China negotiations re due to move into phase two and investors were likely to be wary. I also think the challenges facing the UK & EU to avoid a hard exit at the end of 2020 are underappreciated by the market. While these remain as risks further out in time, in the short term the market is focused on a stronger than expected pick-up in economic activity and corporate earnings.
Early indications in the US show most sectors generating reasonable earnings growth with positive surprises. Promisingly, companies are seeing both top-line and bottom-line growth. There are some areas of weakness such as the energy & materials sectors which are suffering from weak commodity prices. Weakness in industrials is really focused on Boeing due to their 737 Max problems.
Within consumer discretionary it is the beleaguered auto sector that continues to weigh down the aggregate. Overall, there have been more positives than negatives. This improves the fundamental underpinning of equity markets: i.e. businesses are growing. But I’m still nervous about sky-high valuations.
I have written a separate blog about the potential impact of coronavirus. In short, I think it is most likely to have a significant but short-lived impact on growth. Markets might take a material dip over the next few months as economic data is released, and company earnings may be hit by supply chain disruptions. But, provided the virus is brought under control, the impact should be short-lived and allow the broader recovery to continue.
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