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Key Takeaways:
- Focus in March could turn political as primaries dominate headlines
- Coronavirus, along with some late-breaking earnings reports, also in the mix
- Fed meeting at mid-month not seen rocking the boat much, at least as of now
Until late February, it looked like March might be a transitional kind of month, with earnings behind and the U.S. election season ahead.
However, February ended with fears of the coronavirus spreading rapidly as we see more cases. Investors got knocked back on their heels with a late-February sell-off, which saw major indices go negative for the year after starting the month with a huge rally.
No one has any answers as coronavirus firmly occupies front and center going into the new month. The market had mostly been shrugging off the steady flow of virus headlines until late February’s huge plunge. That certainly served as a reminder that we're far from out of the woods when it comes to the illness. Similar to the trade war of last year, the virus can potentially last longer than anyone thinks. However, it is much more difficult to predict the final outcome.
Coronavirus is likely to keep sucking all the air out of the room, especially if it continues its global spread. While China seems to be buttoning things down, the spread to places like South Korea and Italy looked alarming and helped lead to the late-February market cratering. Fears that it could get a foothold in the U.S. also contributed to Wall Street’s recent weakness. Investors likely will continue watching for medical progress vs. the virus or a slowdown of its spread. At this point, those are the kinds of things it might take to put things back on more solid footing.
This isn’t necessarily a market where you can draw a line in the sand. It’s likely we’ll see the coronavirus drama play out for quite a while with the assumption being that earnings could be affected this quarter and maybe in the future. Earnings drive stocks, and now there might be a need to align stocks with these new earnings expectations. So it could be interesting to watch for any adjustments in Q1 earnings projections from analysts as the new month begins.
One thing besides the virus that does stand out about this March vs. other recent ones is politics. While this isn’t a political column, the market is definitely tuned into the presidential primaries, and investors should consider getting prepared for possible ramifications across sectors and asset classes.
Things could intensify on Tuesday, March 3, which is “Super Tuesday” in the presidential primaries. Whatever your political leanings, it might be hard to ignore the outcome if stocks start moving based on election results. At this point, it’s too early to get a sense of who the Democrats might ultimately pick as their nominee (though as of late Feb. Bernie Sanders' momentum has certainly been the story). After Super Tuesday—when 14 states including massive California and Texas hold their primaries—people might have a better sense of the political landscape.
Concerns Could Grow as Primaries Advance
The market’s sharp downward move on the morning of Feb. 20 after an intense televised Democratic debate the night before might give some insight into possible investor reaction on Super Tuesday. There’s growing concern—again, from a market perspective—that a candidate who isn’t typically thought of as business-friendly could emerge with a clear path toward the nomination. If that looks more likely when we wake up on the morning of March 4, it’s possible additional pressure could hit stocks.
All this has nothing to do with anyone’s views on the merits of any candidate or their particular positions, because that’s not the point of this column. What we’re talking about are potential market worries that might emerge if certain candidates pull ahead. Though stocks have historically gone up and down under both Democratic and Republican presidents, any sign of a candidate gaining strength while proposing more restrictive taxes and regulations can get some investors nervous. Conversely, strength in a candidate who might be amenable to massive fiscal policy expansion could stoke enthusiasm in the market.
These dynamics might start showing up in some sectors more than others, depending on which candidate or candidates seem to have the upper hand as March advances. Financial, Energy, and Health Care stocks could find themselves on shakier ground amid concerns about potential tighter regulations on banks, oil and gas production, and drug prices, for instance.
All this is speculation for now, and we’ll know more once the new month has “marched” along a bit. By the end of the month, 31 states plus Puerto Rico will have spoken in primaries or caucuses. Whatever happens, if you’re a long-term investor it’s important not to get too caught up in election-based emotion and volatility. Typically, businesses don’t rapidly shift gears or change direction based on talk alone but rather choose to wait for legislative action.
Plus, when it comes to changes in a company’s business policy or strategic direction, monetary and fiscal policy can hold just as much—if not more—weight than political rhetoric.
Run Toward “Defensive” Assets Might Not Be Over Yet
Primary season takes place when stocks might be more vulnerable than usual to outside influence without earnings to zero in on. Don’t be surprised to see continued volatility as geopolitical news, including voting patterns and any new coronavirus developments, hits the headlines. Any political jitters might send more money flowing into so-called “defensive” assets like gold and bonds, both of which climbed rapidly in February amid coronavirus fears. Yields recently hit all-time lows for 30-year U.S. bonds and approached record lows for the 10-year Treasury note.
In fact, you could argue that relationships are “out of whack,” to use a scientific term. Both bonds and stocks have been moving quickly upward. Eventually it’s likely something might give, and the late-February activity pointed to stocks.
As we noted above, it’s not a big month for earnings, but by now investors have a better sense of how Q4 results shaped up for companies. A few trends emerged, with Information Technology firms generally doing better than expected, multinational companies getting dented slightly by the firm dollar, and retailers unwrapping a less than perfect Christmas shopping season. Apple (AAPL) recently made some waves when it warned that revenue would probably miss its guidance due to the virus.
As of late February, Q4 earnings for S&P 500 firms were expected to grow 1.6%, according to S&P Global Market Intelligence. That’s weak, but a lot better than the original projection for slightly negative results overall. So far, Energy and Materials were the sectors bringing up the rear, while Financials and Utilities enjoyed double-digit earnings growth, research firm CFRA said.
The Feb. 24 market selloff really took a bite out of travel and semiconductor stocks. Information Technology as a sector got slammed. The virus is likely to determine whether these sectors get any relief in March.
Before things went south in late February, stronger than expected earnings helped contribute to new record highs for major U.S. indices in February, with certain stocks really taking off. Tesla (TSLA) and Nvidia (NVDA) were among the month’s leaders, and one question for March is whether these two can continue their meteoric rallies. You never can say never, but at least as far as TSLA, it looks like speculators have really taken over. That doesn’t mean it can’t go higher, but anyone stepping to the plate on this one should consider keeping trade sizes down and not going “all in.”
The chip sector, including NVDA, could be interesting to watch in March after many shares cratered in late February. With AAPL’s recent warning in mind, it might be important to start hearing from the chip companies, which also have huge exposure in China. A bunch of chipmakers recently dished out some very optimistic guidance, but can this hold up if the virus is hurting AAPL? Both NVDA and Micron (MU) got downgraded by analysts in late February.
Companies Could Give Insight into Virus Impact, Consumer Health
Though earnings season is basically over, analysts will get a chance to hear from one major chip company on March 25, when MU is scheduled to report fiscal Q2 results. It’s likely the company’s guidance will be in sharp focus, as will any words about the virus and its impact.
MU isn’t the only “out of season” earnings highlight this coming month. Some other big names to look for include retailers Kohl’s (KSS), Dollar General (DG), and Dollar Tree (DLTR), tech companies Broadcom (AVGO) and Oracle (ORCL), delivery firm FedEx (FDX), and Dow Jones Industrial Average ($DJI) member Nike (NKE).
Reports from many of these firms might help give investors a fresh perspective on consumer health. The retailers and NKE can speak to that, and NKE can also probably provide an update on the situation in China where it’s temporarily shut a number of stores due to the virus.
AVGO and ORCL also can potentially discuss the virus impact on their industries and also give some general insight into business demand for technology. That’s sometimes a good indicator of general corporate health, and Cisco’s (CSCO) disappointing results in February have some analysts concerned on this front.
Don’t Forget the Fed
Beyond politics and earnings, there’s a Fed meeting on the way. It wraps up on March 18, and follows the Fed standing pat in December and January. The latest Fed meeting minutes, released Feb. 19, showed Fed Chair Jerome Powell and company sounding pretty unlikely to make any new rate cuts soon, though things could obviously change between now and mid-March. As of late February, the futures market put odds of a March rate cut at just 270%. However, the late-February market meltdown helped steer the rate outlook downward, and though it's still likely the Fed will hold the line in March, there may be one or two rate cuts coming later in the year.
Even if the Fed keeps things unchanged for a third-consecutive meeting, it’s never a bad idea to listen closely to Powell’s post-meeting press conference, which sometimes moves the market. He’ll likely provide a sense of how the economy is doing and updated projections for growth in the quarters ahead.
This Fed meeting also will include an updated “dot-plot” that shows Fed officials’ longer-term rate projections. This isn’t the most scientific thing in the world, but it can sometimes be a helpful road sign for investors looking for a sense of where the Fed sees things not just in the next quarter but into next year and beyond.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
