China in focus as coronavirus spreads — what to watch in the market in February


Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Knowing what's happening in the market can make you a smarter investor and help inform your long-term strategy.

The deadly coronavirus has rattled markets in recent weeks, with the S&P 500 falling 0.2% in January and snapping a four-month streak of gains. Meanwhile, the Dow Jones Industrial Average experienced its worst day since August.

The stock market has taken a pause, both from those streaks of setting new all-time highs and from the relative calm state it had been in since October. Earnings season has helped in part to curtail bigger losses, with more than 70% of U.S. publicly traded companies having reported results that beat analyst expectations, FactSet data shows.

Meanwhile, other assets reflect growing concern about a possible economic downturn. Oil prices slumped 15% for the commodity's worst January since 1991. The price of gold surged for a sixth straight week to the highest level since 2013. Finally, the yield on the benchmark 10-year Treasury note briefly fell below the three-month Treasury rate, creating what's known as an inverted yield curve, which has been a reliable recession predictor in the past.

The pace of economic growth, both in the U.S. and globally, will be front and center in February. That's because the coronavirus is "a wild card" and it's difficult to quantify the economic impact of the rapidly spreading virus. And the month ahead officially kicks off the 2020 presidential election season, as four states — Iowa, New Hampshire, Nevada, and South Carolina — will hold caucuses or primaries for voters.

Here's what you need to know about the month ahead.

The pace of global economic growth could improve

What's happening: Coming into 2020, David Joy was anticipating that the global economy would improve, thanks to developments like the so-called phase one trade deal between the U.S. and China. "Now we have some real questions about all of that, in part because of the coronavirus," says Joy, the chief market strategist of Ameriprise Financial.

The International Monetary Fund has projected that global economic growth will rise to 3.3% in 2020, from an estimated 2.9% last year. In the U.S., the economy grew 2.3% in 2019, its slowest pace in three years.

Earlier in January, some experts thought recession fears had been put to bed, but traders in the bond market appear to be spooked once again.

Why it matters: Because China is the world's second largest economy, it's very important to the pace of global economic growth. Professionals on Wall Street like Joy will try to anticipate ripple effects of any signs of slowing there. "All of a sudden, monthly data coming out of China is going to be very important," he says, pointing to reports like retail sales or industrial production.

What it means for you: No one knows the impact the coronavirus will ultimately have on economic growth and ultimately the stock market, which explains the recent turbulence in the stock market. While there could be more exaggerated moves in stock prices in the weeks ahead, long-term investors should avoid reacting to daily fluctuations in the market. Instead, remain focused on the bigger picture and take advantage of these ups and downs by continually adding money to your portfolio with a strategy known as dollar-cost averaging.

All of a sudden, monthly data coming out of China is going to be very important.
David Joy
Chief market strategist, Ameriprise Financial

Other events could rattle the market

What's happening: Some of the causes of market instability in mid-2019 — including the U.S.-China trade war, what the Federal Reserve's next steps with interest rates would be, and the pace of U.S. economic growth — have stabilized, according to Tom Martin, senior portfolio manager at Globalt Investments. And that stability helps explain why investors had been keen to continue pushing stock prices higher, prior to concerns about the coronavirus, he adds.

Now, Martin's question is: "What's going to upset that and reintroduce some instability in the market?" The 2020 presidential election could, so he'll closely watch the results of the upcoming caucuses and primaries.

Why it matters: Based on Martin's analysis of other professionals on Wall Street, "an overwhelming majority" believe that President Donald Trump will get re-elected come November. "There's some degree of complacency," Martin says, which sets up the potential for surprise, depending on which Democrat wins the party nomination. Wall Street's take on politics differs from national polls that suggest some leading Democrats could oust Trump in hypothetical head-to-head match-ups.

Even so, some prognosticators are worried that there could be some short-term bumpiness on the results of the Iowa caucus, and have warned that it could be a wake-up call for the stock market.

What it means for you: Martin sees no signs of something on the horizon that would truly destabilize markets. And regardless, most experts remind you not to let short-term events and news headlines affect your long-term investing strategy.

Bottom line

Historically February is one of the least remarkable months of the year, with the S&P 500 ending flat, according to figures compiled by Yardeni Research. While some market watchers expect there to be more bumpiness ahead, it's likely to be temporary. Wall Street strategists surveyed by CNBC forecast that the index will finish 2020 almost 5% higher than its 2019 closing level, based on their median target.

Regardless of what happens in the coming month, remember that you don't need to make any changes to your long-term investing strategy based on short-term events. The market's performance in 2019 is a good reminder to stay the course.

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