Stocks enjoyed their strongest week of the new year last week. A combination of promising economic data, optimism regarding the spread of the coronavirus, relatively modest declines in Chinese equities, and the end of the impeachment process in Washington led to a 3.2 percent gain in the S&P 500® index. Stocks in the Eurozone were even stronger, as the EuroStoxx 50 index surged higher by 4.3 percent. In China, the Shanghai Composite index fell 3.4 percent on the week, a comparative victory as trading activity resumed following the Lunar New Year holiday. Bond yields climbed as well. The ten-year Treasury yield rose to 1.58 percent from 1.51 the prior week. High yield credit spreads narrowed sharply, falling to 375 basis points from 403 the previous week. And the dollar rallied, as the DXY dollar index climbed from 97.4 to 98.7, its highest level since October.

It remains to be seen, however, whether such optimism is justified. The coronavirus remains uncontrolled. Chinese officials point to a lowered trajectory of new infections, yet, at the same time, the World Health Organization warns of international exposure being perhaps just the tip of the iceberg. The number of infections now officially totals 40,000, although some believe the real total may be significantly higher. So far, there have been 908 reported deaths, more than during the SARS outbreak. Some economic activity in China is expected to resume this week as the extended New Year holiday ends. But how many will be returning to work is unclear, as fear of infection remains paramount. Just as unclear is the economic impact of lost productivity on first quarter GDP, both in China and globally.

Pre-Virus Economic Data Was Encouraging 

Meanwhile, last week’s domestic economic data was encouraging, although it largely reflects activity generated before the virus outbreak. Nevertheless, the U.S. jobs market continues to surprise, as the economy created 225,000 new non-farm jobs, well above the consensus 165,000. There were likely some seasonal factors that inflated the total, including good weather, and temporary employment was weakened, but there was little else to criticize in the report. Also, last week, the ISM report on manufacturing activity in January rose into expansion territory for the first time since last July. And the composite index, including the far larger service sector, rose to its highest level since last March.

In Europe, the data was less encouraging, although it is somewhat stale. In Germany, the region’s largest economy, December industrial production and factory orders plunged at the sharpest pace in ten years. On Friday, Germany will release its fourth quarter GDP report. The consensus anticipates growth of 0.1 percent, but that expected outcome could be in jeopardy. Fourth quarter GDP for the full Eurozone is also scheduled for Friday with a similar anemic growth expectation.

Investors Keeping an Eye on Economic Data, New Hampshire and Earnings this Week

The economic calendar in the U.S. this week will provide an initial look at January activity, with reports on consumer prices, retail sales and industrial production scheduled, along with small business and consumer sentiment surveys. Voters in New Hampshire will go to the polls on Tuesday in the nation’s first primary, and Fed Chair Powell testifies before Congress.

Fourth quarter earnings season is now roughly two-thirds complete, and the picture remains likely that final aggregate results will exceed expectations enough to generate a modest year-over-year gain of 0.7 percent. That compares to an initially expected decline of more than 2 percent. One company reporting last week offered particular insight into the current situation in China. YUM China holdings operates over 8,000 KFC, Pizza Hut and Taco Bell stores as the largest western fast food company in the country. Management said it might experience a loss for the first quarter and possibly for the full year after closing roughly 30 percent of its stores due to the virus outbreak. Of the stores that remained open, traffic was 40-50 percent lower than the comparable Lunar New Year period last year. Among those companies expected to report this week are Cisco, Nvidia and Alibaba.

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The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.

The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list. 

The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.

It is not possible to invest directly in an index.

The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" (value) when compared to other currencies.

The ISM Manufacturing Index (composite index) is a widely watched indicator of recent U.S. economic activity. Based on a survey of purchasing managers at more than 300 manufacturing firms by the Institute for Supply Management (ISM), the index monitors changes in production levels from month to month.
Past performance is not a guarantee of future results.

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