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Bloomberg
Investors who assumed the quarterly deluge of corporate results would determine the direction of stocks in late January have obviously found themselves with much bigger concerns to cope with.
Earnings season is fast being forgotten in a market where cascading fear about the human toll of coronavirus has come to dominate sentiment. The S&P 500 just dropped the most since August, and traders braced for another volatile session on Monday when equities begin to trade again in China.
A raft of indicators show how the outbreak has drowned out news that would ordinarily be obsessing Wall Street traders. Correlation among stocks has shot up, the opposite of what usually happens when companies disclose results. Surprisingly strong earnings from a handful of trillion-dollar megacaps has done nothing to boost their peers.
“Markets are trading on
virus fears, not improving US fundamentals,†said Michael Kantrowitz, head of portfolio strategy at Cornerstone Macro LLC.
The S&P 500 sank 2.1% in the five days, wiping out gains for the year. As recently as last week, it seemed possible stocks would take the health scare in stride after the World Health Organization boosted efforts to contain the virus. Then came January 31, when mounting concern about the spread of the illness stoked the biggest sell-off in the S&P 500 in six months.
Tractor giant Deere & Co and beverage maker Coca-Cola Co closed their facilities in China, while Apple shut some of its stores. Regions that are home to a Tesla Inc plant, a Nike Inc factory and a Foxconn plant that makes iPhones have been affected.
The outbreak will cut US first-quarter economic growth by 0.4 percentage point, Goldman Sachs Group Inc said, as the number of tourists from China plunges and exports to the Asian nation slow.
As equity markets from Europe to Australia blared red, it became clear that surprisingly strong earnings from Apple, Microsoft and Amazon — stocks that together make up 13% of the S&P — could do little to support equities. All but one of the 11 S&P 500 sectors fell on January 31 as the index dropped 1.7%.
The outbreak has not only pushed the S&P 500 lower but triggered a jump in lockstep moves among stocks, something that usually doesn’t happen during earnings season when individual companies deliver results. Correlation among the top shares in the S&P 500 has spiked to as high as 0.33 from 0.20 three weeks ago, data compiled by Bloomberg show. A reading of 1 means they’re moving in unison.
It remains to be seen whether the outbreak of the virus that’s killed 300 people and infected more than 14,000 will have a long-term impact on US economy and stocks.
For now, concern about the spread of the virus has made it impossible to care about the small distinctions in earnings that can sway equities in normal times.
For the record, among S&P 500 companies that have reported results, 71% have beaten profit estimates, in line with the 10-year average, data compiled by Bloomberg Intelligence show. What had been forecast to be a 1.9% decline in earnings is now on the verge of turning positive.
Those facts mean little in a market ruled by anxiety.
“Markets were complacent earlier this week because past viruses didn’t create a drastic global dislocation of growth — that was the consensus, until today,†said Chad Morganlander, a portfolio manager at Washington Crossing Advisors, said by phone.