What's up Bull Market? How Much Longer Will You Run?

The market was in a panic today. The coronavirus is becoming a bigger concern with cities in Asia going on lockdown, travel is restricted, and the virus spreading to other countries. The market is becoming too expensive and calls for a good defense. Earnings season commenced this week and 70% of the companies that reported beat expectations, but there is still fear in a slowdown in corporate earnings. Phase 1 deal with China was a success, the USMCA deal is in the works to be passed, and the Central Bank is using all of their resources to keep the market afloat at an all-time high. In the short-term, the market is obsessed with the Fed’s monetary interventions. The market is at full-bullish. The put/call ratio is hitting historic lows and with new-highs at every market close, investors are getting a sense of FOMO where they feel they need to catch the ride up. Investors are starting to question the current economic expansion and are starting to ask the question of when it is going to end.


Dear Reader,

The Market:

• REITs sell-off leading to interest rate fears, and quickly recover their losses thereafter.
  • The common wisdom is to avoid REITs in times of rising interest rates as it may result in higher borrowing costs and lower NAVs.
• Homebuilders are outperforming the Nasdaq with record new home starts.
• The top hedge fund managers are able to “anticipate market conditions and exploit fleeting opportunities”.
• The 2020 stock market will come down to earnings and cash flow multiples. Valuations are at all-time-highs, will it continue to drive the market or is it too expensive?
  • Look for companies that are defensive with great growth opportunities
• Upcoming risks:
  • Weakness in the earnings season
  • Elections
  • General uncertainty
• New student loan inception has decreased but the student loan debt market has been increasing. This is due to the loans not being paid off. Over the past decade, the existing balance eliminated each year has averaged 3%. The average federal loan interest rate for undergraduates is 4.5% and 6.08% for graduates (See graph below).
• In October 2014, the Ebola scare was at its all-time highest and the S&P 500 had a 10% sell-off during that same time. Now, the coronavirus in Asia is causing some fear and we can make a close analogy. This could present a great buying opportunity.
• The WHO opted against calling the coronavirus a global public health emergency. If China can’t contain the problem, we may see this virus become a global emergency.
  • The city of Wuhan where the virus started banned all travel
  • China restricts travel for 40 million people
  • This virus can be compared to others. The graph below shows the market take on each virus/epidemic/global health emergency (See graph below) 
• Global short-term interest rates are close to zero or below zero and cannot be cut much more, which has deprived central banks of their main lever if a recession strikes.
• Looking to buy into ESG investments? BlackRock has a new lineup that can fulfill your needs (See graph below).

Capitalism. The age-old debate of economic structure, the battle between socialism and capitalism, has become more prevalent than ever. These two structures, in their simplest form, can be differentiated between capitalism representing less government intervention, more company choice, with socialism being the counter. Although capitalism has its downfalls, such as corporations taking advantage of the populous, it has worked for us for the past few hundred years. Capitalism is definitely not the end all be all, our financial system is so young, that we don’t know exactly what completely works yet. What we do know, however, is what has led countries to turmoil through incentive issues, lack of property rights, and generally poor quality of life, and that seems to be pure communism. Although socialism weighs on the left, such as communism, it is far closer to the middle, being much closer to capitalism than many think. What lies in store for the future, in regards to how powerful the government will become, or possibly the counter with corporations, time will only tell.
 Boeing. It seems like Boeing just can't keep out of the news nowadays and is once again making the rounds as a result of negative news. Boeing released news on the return of the notorious 737 Max, which has been the spark of all the negativity regarding Boeing, stating that the plane most likely will not return to flying until Fall 2020 at the earliest. This is not great news for the company, but at the end of the day, it will help to ensure safety for people across the globe, which is most important. Boeing, which has halted the production of this troubled aircraft, does not get paid until they deliver the planes, which can't be done until they get recertified by the FAA. Recertification is likely to happen sometime in mid-2020. This has increased the expected costs for Boeing, which are now at around by $10 billion. Some analysts expect costs to reach $20 billion by the time planes get recertified in mid-2020. The halt of production has ramifications up and down the supply chain, as well as costing customers like Southwest in lost profits. Boeing is seeking a $10 billion loan at a similar price point of its previous loans. The full details of their costs, expectations, and loan will likely be revealed during their earnings call at the end of January. Analysts are expecting low revenue, low earnings, and increased liabilities. This has led to the stock being down right around the 52 week low recently. The Dow, which is a price-weighted index, has been dragged down by Boeing's $300+ share price. Many people see the rock-bottom price of Boeing stock and think it could be a good deal, however it is very plausible that the stock is still overvalued. 

Public Health Emergency of International Concern. Defined by the World Health Organization as “an extraordinary event which is determined to constitute a public health risk to other States through the international spread of disease; and to potentially require a coordinated international response”. This definition implies a situation that: is serious, unusual or unexpected; carries implications for public health beyond the affected State’s national border, and may require immediate international action.” Initiating a PHEIC is not something the WHO does lightly, as it signals the broader need for international cooperation and access to emergency funding and protocols. The last major PHEIC was the Ebola outbreak in West Africa that lasted from 2014-2016.

Coronavirus outbreak in Wuhan, China. A new treatment-resistant virus has infected over 800 people and has spread to eight major cities in the country, as well as seven other countries, including Thailand, Japan, South Korea, Taiwan, Vietnam, Singapore, and the United States. New cases have exploded since the outbreak was first noticed last week. A coronavirus is a particularly volatile form of viral infection, in that it has the potential to mutate easily and jump from other mammalian species to human hosts. Chinese officials hypothesized that this is what happened in this particular case, as there is a large market near the Wuhan train station, where the disease is thought to have originated. While this virus is not nearly as deadly as past coronaviruses, such as SARS and MERS, the transmission of this virus has shown itself to be particularly active, worrying officials and markets. The Chinese public is especially vulnerable due to the widespread Lunar New Year’s celebrations that are taking place this week, leading to the migration of millions across the country for festivities and family visitation. The government has mobilized the military and quarantined infected cities while shutting down previously planned celebrations, but its lack of transparency with the international medical community has significantly hampered the ability of the WHO to assist with the outbreak, and as of now still has not declared a PHEIC due to the lack of information. 



Keep Climbing,


The Alchanati Campbell and Associates Team