Super Bowl Predictions

While January started off strong, most of its gains were given back this week.  As I mentioned last week, the threat of a pandemic has a way of unsettling investors as demonstrated by the pullback after both the SARS virus and MERS virus.  The bad news is that we probably haven’t seen the bottom yet.  Remember, I pointed out markets dropped 6.5% and 9% respectively with the SARS and MERS outbreaks.  We are currently flat for the year on the S&P 500 but down about 3% off the top.  As the number of cases plateau and the mortality rate is better understood, markets will eventually settle down and regain some measure of confidence.

With a diversified portfolio, shocks like these will cast a glancing blow but shouldn’t create any long-term damage.  As would be expected, not all sectors of the economy are affected in the same way or to the same degree.  If we take this week as an example, the sectors which were hit the hardest include energy, health care, and communication services which were down 2.75-3.5%.  Among the hardest hit industries are the airlines, industrial metals, automotive manufacturers, cruise ships and hotels, and those companies with large retail exposure to China.  Alternately, the utility sector looks to finish the week up 1.5% with technology and consumer staples following closely.  This is all to say, the value of diversification we design into your portfolios is demonstrated most in times like these. 

Worth noting is that the Federal Reserve met this week, as scheduled, to discuss the state of the economy and more importantly its policy on interest rates.  As expected, the board of governors voted to keep rates unchanged and repeated that it stands ready to do whatever is necessary to ensure the economic expansion continues.  Chairman Jerome Powell observed that some uncertainties, chiefly regarding trade tensions, have diminished, but others have emerged, “including those posed by the new coronavirus.”  The pace of job growth remains solid and inflation remains below the central bank’s 2% goal.  While he didn’t say this, some economists expect the impact of the coronavirus on China’s GDP could be as much as 2%.  If that were to occur, it is likely that not only will China not be able to keep it’s end of the trade agreement, but that the Fed could have to step in later this year to begin lowering rates once more. 

On that note, U.S. GDP grew at 2.1% in the fourth quarter which was in-line with analysts’ expectations.  For the year GDP grew at only 2.3% which is well below the White House’s target of 3%.  The truth is real GDP growth hasn’t exceeded 3% in over 15 years and likely won’t anytime soon.  The growth rate is lower than the historical average because of long-term demographic trends and falling productivity.  CBO director, Phillip Swagel, put it best when he said, “the United States is an aging society.  That means the growth of our labor force will be slower in the future than it has been in the past.”  The silver lining, as mentioned last week, is that consumer credit keeps rising and as long as consumers keep spending, we should keep growing.  Now whether that present potential long-term problems, is a whole other issue.

I should mention in passing that after what seems like a decade talking about Brexit, we’re finally at the finish line.  As of midnight tonight, the United Kingdom will no longer be a part of the European Union.  It is not clear what the long-term consequences will be as there are strong arguments both for and against this breakup.  However, before you break out the bubbly, you should know that while the split is final, the negotiations must now commence again regarding trade and travel between the U.K. and the rest of Europe.  In a nutshell, I fear we’ll still be talking about this a year from now.

In closing, I want to remind everyone that the Super Bowl is this weekend.  While you may not necessarily be interested in football, as an investor you should know this little tidbit.  The Super Bowl Indicator is a superstition that says that the stock market’s performance in a given year can be predicted based on the outcome of the Super Bowl that year.  The prediction is that if a team from the American Football Conference (AFC) wins, then it will be a bear market, but if a team from the National Football Conference (NFC) or a team that was in the NFL before the NFL/AFL merger, it will be a bull market.  This presents a bit of a problem for me because I will be rooting for Patrick Mahomes and the Kansas City Chiefs who are in the AFC.  We’ll have to see how this shakes out.  Now you know.

Bruce J. Mason, MBA