Global business activity is taking an unexpected hit from worries over the coronavirus outbreak, according to recent data from IHS Markit. As the chart below shows, the IHS Markit purchasing managers’ index fell sharply through mid-February with U.S. Services Business Activity Index falling to 49.4 (53.4 in January), a 76-month low. The IHS Manufacturing Survey (below) also fell to 50.8 (51.9 in January), a 6-month low. New orders fell for the first time since data collection began in 2009.

Hesitancy among firms due to coronavirus is causing a decline in business activity in the United States. This is the conclusion reached by IHS Markit’s economist in reaction to the surveys mentioned above. Chris Williamson, Chief Business Economist at IHS Markit, said: “Manufacturing production ground almost to a halt due to a near-stalling of orders.” He went on to say that the survey data was consistent with a 0.6% pace of GDP growth in February, down from 2% in January. Somewhat counterintuitively, he also said that business sentiment about the year ahead saw a notable upturn, reflecting “widespread optimism that the current slowdown will prove short-lived.”

The Test for Bulls

For the bullish case for stocks to stay intact, it is important that business confidence remains firm. To see a pickup in earnings to support higher valuations, businesses confidence and capital spending will need to see a boost. The downtrend in global activity in 2019, exhibited in the chart above, halted in the back half of last year. Monetary easing, a trade truce, and leaner inventories set the stage for a sustained upswing at the start of the year. However, two new wildcards — coronavirus and uncertainty over the U.S. election — pose risks to this outlook. A relapse into contracting business activity or a darkening profit outlook would make the bull case for equities a harder one to advance.

Safe Assets Rally

Another record low was set last year for long-term U.S. Treasury bond yields (charts, above left). The 30-year U.S. Treasury bond fell to yield near 1.9% last Friday after two strong days of gains in the bond market. Never before has the long bond carried such a low yield. The 30-year inflation rate priced into inflation-protected Treasury bonds is only 1.7%, implying that the market is priced to realize just a 0.2% real return for holding the most extended end of the Treasury yield curve. Also, the spread between 10-year U.S. Treasury yields and 3-month Treasury bills again turned negative last week and ended the week at -7 basis points (-0.07%). As we discussed last summer, this “inversion” or negative spread is often seen as a harbinger of slowing growth or recession.

As bonds have rallied, so too has gold (chart, above right). Gold is up 26% since last June versus a 22% gain in the S&P 500 (a large-cap U.S. equity market index). The rise in gold and jump in Treasury prices can mean that investors are seeking “insurance” or “safe” assets. Such run-ups are not uncommon during uncertain times but can reverse course violently once the proximate cause of market jitters fade.


The last week’s market action and dataflow did little to advance a bullish case and suggest worries over the coronavirus will likely hurt near-term growth. A bigger question remains: will business confidence continue to hold up despite the coronavirus outbreak and jitters surrounding upcoming U.S. elections. If confidence does hold up, the hit to growth could prove short-lived and be followed by a sharp second-half rebound.

Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Steve Lerit, CFA, Client Portfolio Manager
Suzanne Ashley, Analyst
(973) 549-4168


The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecast in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.

Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small-company stocks are typically more volatile and carry additional risks since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. Bond laddering does not assure a profit or protect against loss in a declining market. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments.

All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance, and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.

This commentary often expresses opinions about the direction of market, investment sector, and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.

The securities discussed in this material were selected due to recent changes in the strategies. This selection criterion is not based on any measurement of performance of the underlying security.

Washington Crossing Advisors, LLC is a wholly-owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF). Registration with the SEC implies no level of sophistication in investment management.