In the World

As some risks that fueled uncertainty last year faded – chiefly trade tensions and Brexit uncertainties – new risks emerged across the globe. Trade tensions broadly eased as President Donald Trump signed both the Phase 1 agreement with China and the USMCA (also known as NAFTA 2.0). Turning to Brexit, the U.K. officially began its 11-month transition period to exit the EU; the continuing negotiations are expected to be difficult given the tight timeline sought by the U.K.’s Conservative Party. These generally positive developments, however, took a back seat to a new risk: the outbreak of a new coronavirus in China; more than 9,700 people were infected, and more than 200 died by month-end. While concentrated in China, the illness quickly spread to other countries, and the World Health Organization officially labeled the outbreak a “global health emergency.” January also saw the return of geopolitical tensions when a U.S. air raid killed Iranian General Qassem Soleimani and Iran retaliated against U.S. troops – though the tensions appeared to calm somewhat. In other important news, Italian populist Matteo Salvini lost a crucial election; the impeachment trial got underway in the U.S. Senate; and Russian President Vladimir Putin announced a government restructuring plan that critics alleged was a way to sidestep constitutional term limits.

Early gains in risk markets were erased by month-end mainly on concerns over the impact of the coronavirus. Anticipating the signing of the Phase 1 deal, markets welcomed the reprieve in trade tensions with a rally in risk assets and fresh highs in U.S. equities. However, sentiment quickly soured as the coronavirus spread; some feared the outbreak could stifle demand to the point of shaving a meaningful percentage off of world GDP. Oil prices in particular sharply corrected, and global equities broadly ended the month with losses – in the U.S., the S&P 500 slipped from more than a 3% gain to end the month flat. Developed market sovereign bonds, gold, and the U.S. dollar rallied in the risk-off environment, while credit spreads widened. U.S. corporates, the large-cap tech sector in particular, represented a bright spot, with robust earnings that emphasized the resilience of U.S. companies in the face of weak global growth (see chart for more detail).

Economic fundamentals started the year on a better footing. In the U.S., the unemployment and labor force participation rates remained stable, payroll employment increased, and 4Q GDP growth appeared solid at 2.1%, consistent with economic targets. Strong retail sales and a modest increase in consumer confidence further supported the economic environment. Globally, composite PMIs reflected expansionary conditions: Measures for Japan, the U.K., the euro area, and the U.S. either stayed steady or increased. Given the relative stability in their respective economies, global central banks, including the Federal Reserve, Bank of Japan and European Central Bank, generally held policy rates steady. While rates were also unchanged in the U.K., the Bank of England downgraded its growth estimates, citing lingering uncertainty even after the official announcement of Britain’s departure from the EU. Meanwhile, China’s economy grew at its slowest pace in nearly three decades in 2019 (6.1%), which, coupled with the coronavirus outbreak, spurred concern over the impact of a more fragile Chinese economy on the rest of the world.

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The $1 trillion club
With Amazon and Google* surpassing the $1 trillion valuation mark in January, four technology-focused companies (collectively “MAGA” − Microsoft, Amazon, Google, Apple) are now part of the $1 trillion club and together comprise over 16% of the S&P 500’s market value. Somewhat reminiscent of the dot-com bubble when a handful of technology companies also held a hefty share of the index’s market cap, MAGA companies have dominated the growth equity story over the last several years and were standouts this earnings season. Despite large market caps and the lingering potential for regulation, the group continues to grow revenues meaningfully with robust free-cash-flow margins, suggesting they could maintain their dominance.

*via parent company Alphabet