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Posted February 5, 2020

The New Year Rally

Forrest Bell, CFP

Forrest Bell, CFP®

After a strong 2019, U.S. stocks initially rang in the New Year by gaining three percent in the first few weeks of January, possibly due to continued optimism of the U.S.-China phase one trade deal. But this rally ended with most major U.S. indices ending the month where they started. Interest rates also fell, with the yield on ten-year treasuries declining to about 1.6%. While attempting to assign a narrative to short-term financial market behavior can often be a fool’s errand, there were a couple things that stood out.

The Coronavirus

First, Chinese authorities reported an outbreak of a new strain of coronavirus and quarantined Wuhan, an inland city of 11 million people. Fears of a pandemic’s effect on world economic activity hit financial markets. Until the spread of the coronavirus is completely contained, concerns about it will hold the attention of investors, but we don’t expect a significant impact on financial markets over the medium-term. Unfortunately, the coronavirus joins a long list of other diseases with a tragic impact on human lives, most recently The Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS). SARS had a mortality rate of over 10%, and MERS had an estimated mortality rate of 36%, which are comparatively worse than the current sub-2% mortality rate estimate of the coronavirus strain. Following the SARS and MERS outbreaks, financial markets proved resilient.

Global Growth

Another possible reason the January rally ended is fears of slowing global GDP. While the new coronavirus certainly won’t help on this front, market participants have been worrying about slowing global GDP for quite a while. Last year, China’s GDP expanded at a healthy 6.1%, but China’s expansion seems to lose a little momentum each subsequent year. For reference, China’s growth rate hasn’t been this low since 1990. Eurozone economies expanded a bit over 1% for 2019, and Germany, the region’s largest economy, grew only 0.6%. In the United States, real GDP expanded 2.1% in the fourth quarter of 2019, with a gain of 2.3% for the entire year.

As we proceed into 2020, investors will continue to be influenced by international events and economic conditions. As the year unfolds, the U.S. presidential election will also begin to have an impact, driven by who gets the Democratic nomination and if they can ultimately unseat President Trump. We look forward to sharing our thoughts about these matters in future client letters.

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