The coronavirus outbreak in China unnerved investors in January, leading to a sharp (but short) U.S. stock market drop. Although stocks quickly resumed their rally toward new highs, the reaction highlighted stocks’ near-term vulnerability. At the same time, divergences and weak spots have become apparent in global economic data. Here’s what we’re watching.

U.S. stocks and economy

Although the U.S. economy ended 2019 on solid footing, certain weak spots were clearly developing by the end of the year. The coronavirus outbreak in January further exposed stocks’ vulnerability in the short term. Here are some of the cautionary signs we’re seeing.

1. Gaps between headline and underlying data: Despite weakness in both manufacturing and business investment, U.S. gross domestic product (GDP) growth, at 2.1%, managed to beat expectations in the fourth quarter, chugging along at the same pace as in the third quarter.

However, rough patches are apparent in underlying data. Business investment remained considerably weak through the end of the year. Imports plunged by the most since 2009, highlighting a significant decline in both consumer and corporate demand. As imports dropped, exports became a much bigger contributor to the 2.1% overall GDP growth. Meanwhile, consumer spending was still positive, although weaker than in prior quarters, highlighting the split between stronger consumption and weaker business investment.

GDP growth was unchanged from 3Q 2019, but was lifted considerably by net exports


Source: Charles Schwab, Bureau of Economic Analysis, as of 12/31/2019. *Represents contribution to percent change in real GDP. Numbers may not add up to 100% due to rounding. Real GDP based on annualized Q/Q % change.

2. Lackluster job and wage growth: Meanwhile, job growth was tepid in 2019. The 175,000 average monthly job gain was the slowest since 2011, although the unemployment rate remains low at 3.6% and nonfarm payroll gains have beaten expectations lately. Average hourly earnings for production/nonsupervisory workers grew 3.3% year over year in January—also lukewarm.

Average hourly earnings growth and the unemployment rate have converged, a phenomenon that is typical in the latter stages of the economic cycle. You can see from the chart below that in the past three cycles, these convergences typically occurred shortly before recessions (with the exception of mid-1998, where convergence preceded a recession that didn’t begin until 2001).

Wage growth and the unemployment rate have converged


Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 1/31/2020. *Average hourly earnings for production and nonsupervisory workers, which excludes the supervisory group.