Why do stocks continue to rise in the face of anxiety about the coronavirus? Ongoing support from the Federal Reserve, a stable outlook for corporate earnings and fear of missing out may have something to do with it.
The latest: The Dow finished the week up 1%, while the S&P 500 closed 1.6% higher. Both indexes hit all-time highs mid-week. The STOXX Europe 600 index rose nearly 1.5% after climbing to a fresh midday record on Friday. Even the Shanghai Composite managed to lodge a 1.4% increase for the week.
Meanwhile, the coronavirus outbreak shows no sign of losing steam, as the death toll and number of people infected continues to climb.
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Peter Boockvar, chief investment officer at Bleakley Advisory Group, thinks the explanation is simple: It’s about overconfidence in the Fed.
“I think the stock market is just under this belief that no matter what comes our way the Fed is going to save us,” he told me. “I honestly believe it’s as simplistic as that.”
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He has a point: The S&P 500 has added more than 12% since the Fed stepped in to rescue overnight lending markets last September. Purchases of short-term bonds known as T-bills, announced in October, have helped loosen financial conditions. The real test, Boockvar notes, will come when the central bank stops expanding its balance sheet, possibly in April.
It also helps that guidance for first quarter earnings has not been worse than usual, even as companies express concern about the coronavirus outbreak.
Earnings update: 77% of S&P 500 companies have reported earnings for the last three months of 2019, and 71% have beat profit expectations, according to FactSet’s John Butters. More importantly, fewer companies than average have lowered their expectations for the first quarter, feeding the sense among investors that the business impact may be short-lived after all.
There have been exceptions. Take Under Armour, which said last week that it could lose up to $60 million in sales this quarter, and that “given the significant level of uncertainty with this dynamic and evolving situation, full year results could be further materially impacted.” Shares finished the week down 15%.
But by and large, bullish investors who like stocks can find plenty of reasons to stick around. Boockvar, however, warned that investors should be more circumspect. “There’s just a lot of nonchalance with this virus,” he said. “Maybe it’s nothing, maybe it’s something.”
He pointed to the more cautious attitude reflected in bond markets, where yields remain depressed as more conservative investors pile in. Last week saw the biggest weekly inflow ever into bond funds, according to Bank of America.
