- The coronavirus had stocks spooked in January, and that worry should continue into February, on average the third weakest month for the S&P 500.
- Important data, like the January jobs report, and ISM manufacturing data, will be important as investors look to see whether the first quarter is weakening even before the virus hits growth.
- Earnings from dozens of companies are expected, including Alphabet, Ford, Disney, News Corp and Merck.
- The Iowa caucuses are Monday, and the polls suggest a win by Vermont Sen. Bernie Sanders, a left leaning candidates who is viewed as negative for the stock market.
As stocks enter the month of February, worries about the coronavirus that slammed stocks in January could continue to be a big market catalyst in the week ahead.
There are lots of other possible drivers for markets, including the January jobs report Friday and other key economic news, which comes as worries grow that the economy was already weakening even without the impact of the rapidly spreading virus. There are also dozens of earnings reports, including Alphabet, Disney and Merck.
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Another focus for markets could be the Iowa Democratic presidential caucus Monday, where Vermont Sen. Bernie Sanders could possibly win over former Vice President Joseph Biden.
But the virus headlines could dominate, rattling stocks and continuing to drive investors into the safety of bonds. U.S. airlines Friday said they were discontinuing flights to China, as Beijing tries to contain the transmission of the virus that had infected nearly 10,000 people by Friday.
China's mainland stock markets reopen Sunday night New York time, and investors will be watching for the ripple effects from that expected decline, though traders have been actively trading Chinese market ETFs.
Stocks are limping into February after January's disappointing losses, and analysts see more selling ahead as virus headlines rattle markets. But they are divided on whether the selling will soon be capped, or the pullback will reach 5 to 10%.
The S&P 500 fell 1.8% Friday to 3,225, its worst day since October. It was down 2.1% for the week, and ended the month with a 0.2% loss, its first negative month in five.
"February is the third worst month of the year, with an average negative decline of 0.1%, and it's been up only 53% of the time, versus an average gain for all months of 0.7%," said Sam Stovall, chief investment strategist at CFRA. Stovall said September and August are the worst and second weakest months for the S&P 500, going back to World War II. In general, stocks are higher 60% of the time, over all months.
On Friday, the S&P 500 was about 3.4% from its Jan. 17 high. "I call a decline of 1% to 5% noise. The closer we get to 5%, the louder the noise," said Stovall, adding the S&P could decline as much as 10%.
"I think it's a good possibility, just based on valuation—over 19.6 times forward earnings. That's the most since 2002," he said. "By my metrics, we were overvalued by 9 to 12%, so we end up with a deep pullback or a shallow correction." A correction is when the market loses 10% from its high.
"People have definitely been buying volatility to protect themselves from more of a leg down," said Patrick Kernan, CEO of Cardinal Capital Corp. "We believe, like last Friday, when the coronavirus really started coming to a head, that people were very nervous ahead of the weekend." Kernan, who trades S&P options, said investors do not appear to expect a very sharp decline, but they do see more volatility and more downside for stocks.
RBC chief U.S. equity strategist Lori Calvasina said she has been expecting a 5 to 10% decline, even before the virus, but she expected it to be triggered by the primary season. After Monday's Iowa caucus, the New Hampshire primary is the week after, and Super Tuesday with about a dozen primaries is March 3.
"I still think it's so early. If you were to see Sanders win, I don't thinkthe market would like it, but I wouldn't really change my view," she said. "I still view it as a 5 to 10% pullback. The election has always been a central contributor to that," she said.
Stovall said it's still early in the process and markets could ignore the Iowa vote, even though investors see Sanders' policies as negative for stocks. Sanders supports Medicare for all; would end oil and gas fracking, and would raise taxes for individuals and companies.
"Only 16 percent of those who have won the Iowa primary have gone on to win the presidency," he said. Investors do see Sanders as having less chance against President Donald Trump than former Vice President Joseph Biden, who has lagged him in Iowa polls.
Stovall said investors will certainly be monitoring economic data in the week ahead, after fourth quarter GDP showed a slower pace for consumers and business spending remains depressed. This past week, economists were penciling in a short-lived hit to first quarter growth from the virus before it bounces back in the second quarter. But the first quarter could also see a half percentage point hit from Boeing's production shut down.
Goldman Sachs economists said the virus could shave 0.4 percentage points from first quarter growth but it would mostly recover by the second quarter.
Stovall said he's watching "a combination of earnings and the jobs report because earnings reports could give clues as to what companies are thinking about the virus and the jobs report should give us additional clues about how strong the economy is," he said.
The expectations that the virus could hit global growth has sent Treasury yields sharply lower this week, and the dollar has weakened against the majors. The 10-year Treasury yield was at 1.52% Friday afternoon, and strategists say it could continue to move lower. Yields move opposite price.
The 10-year has also fallen below the yield on the 3-month bill, and the curve has become "inverted." An inverted yield is a recession warning, and those fears are rising again due to the potential impact of the virus on China's economy and the world economy.
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