Markets grew last week, but waters were choppy given some uncertainties. What kept the markets from unfettered growth?

Demand for Oil

Recent data from the International Energy Agency points to a fall in oil demand this quarter. This does not seem interesting at the surface; however, it would be the first fall in 10 years. Last year, demand was expected to rise in 2020.

Corporate Earnings Surprise

So far this year, Q4 earnings have been beating expectations broadly. With 387 of S&P 500 companies reporting 72% have beaten earnings and 50% have beaten revenue expectations. While the earnings growth has been strong, the weak performance in revenue growth could be a concern later this year.

Interest Rate Expectations

Inflation remains contained, when considering the Federal Reserve Boards (FRB) mandate of 2% inflation. Core Consumer Price Index (CPI), which removes food and fuel rose by 2.3% year over year in January. The FRB’s preferred measure of inflation, core personal consumption expenditures (PCE) rose by 1.6% year over year in December. Between this and strong employment data, expectations should be for a rise in interest rates for 2020. Quite the opposite as the FRB is expected to cut rates once during 2020.

Bad Math and the Corona Virus

The Corona Virus (COVID-19) helped markets early in the week and hurt them late in the week. The week started with optimism as new cases of COVID-19 had decelerated from prior weeks. Mid-week there was a change to the reporting method for new cases of COVID-19. The pace did not change, just the method by which they were reporting new cases. When that happened, there was a large jump in the number of reported cases. This brought about concerns of manipulation of data, as well as concerns the pandemic was worse than originally feared. There does not appear to be an issue regarding manipulation and the pace of new cases has continued to decelerate.

Conclusion

The fall in oil demand and the FRB rate cut potential can be tied back to COVID-19. Where would we be had COVID-19 not appeared? There would likely be an acceleration in oil demand, post trade deal. We would see a return to corporate earnings. Also, there would likely be no action from the FRB, or potentially a rate increase. The lack of revenue growth could prove to be a larger headwind in 2020 as COVID-19 wears on without a solution.

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