TSP

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January was a down month for the S&P 500 overall, which represents about 80% of U.S. stock market capitalization and is tracked by the C Fund. After a strong market rally from October through December of 2019 (and into the first half of January 2020), things have become quite choppy again during the second half of January with mixed economic data and everyone trying to guess the economic impact of the coronavirus outbreak.

Notably, the Dow Jones index fell over 600 points on Friday, and all major indices sold off sharply. This was the biggest daily decline since August 2019.

Chart Source: Google Finance

Small company stocks represented by the S Fund have had an even rougher period during this month, and emerging markets, travel stocks, and commodity producers have taken among the hardest hits from this recent sell-off. The full month of January had the biggest divergence in 20 years between growth stocks and value stocks, with growth significantly outperforming.

Solid quarterly reports from Microsoft, Apple, and Amazon helped to keep the large cap index somewhat buoyant. For the first time, there are now four companies in the United States that are worth over a trillion dollars each: Apple, Microsoft, Alphabet, and Amazon. Apple and Microsoft together are worth more than all companies in the Russell 2000 small cap stock index combined.

However, negative headlines about the Wuhan coronavirus outbreak continue to weigh on U.S. and global equity markets. Many countries have closed borders and air routes to China, which is the world’s second largest economy and the biggest consumer of most raw materials.

Notably, copper prices are often viewed as a barometer of global economic health, and prices have remarkably fallen for 12 consecutive days, which is the longest streak on record going back at least fifty years.

Chart Source: StockCharts.com

Last week, some U.S. economic data came in. GDP growth for the fourth quarter of 2019 was 2.1%, which made the full-year growth rate equal to 2.3%, which is considered a bit sluggish by some analysts – albeit about average for the past decade of expansion. In particular, the private consumption and investment parts of the GDP report were weak, but this was partially offset by higher government spending and an improvement in net exports.

Late last week, the Chicago PMI report came out for January, which measures manufacturing activity in the Chicago region. In December it was 48.2, and consensus expectations were that it would increase in January to 48.8. However, it fell sharply to 42.9, and this unexpected decline may have contributed to Friday’s big sell-off in the markets. Anything below 50 on this measure is a contraction, but down in the low 40’s indicates outright recessionary conditions if it persists.

Chart Source: TradingEconomics.com

During the 2001 and 2008 recessions, this measure fell into the 30’s. In 2016, this measure fell to the low 40’s where it is now, but quickly bounced back.

Overall, risks are elevated in the market. The global response to the virus is likely to weigh on Q1 2020 GDP numbers, equity valuations remain historically high, and the recent bullish trend has become more volatile.

Investors would do well to make sure their portfolios are properly diversified and rebalanced, and that their risk profile matches their risk tolerance.

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Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.

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