February 18, 2020

Although the calendar indicates we have started a new decade, many investment trends from the past several years remain constant. In late January and early February, many companies report year-end 2019 results. Continuing the recent theme, companies are stating that consumer spending remains strong and the slow-but-steady U.S. economic expansion is intact. However, new to 2020 are concerns about the coronavirus COVID-19, which seems to be a topic of frequent commentary but rare quantification.

Consumers have been a bright spot in the economy for several years, and management commentary is confirming economic data which indicate high consumer confidence and spending as well as low unemployment. Many retail companies report earnings later than other businesses, so we will hear more color on purchasing trends in the next several weeks. Early indications are that individuals increased their spending during the holiday season, with e-commerce taking market share from brick-and-mortar stores. Additionally, the rollout of new streaming entertainment services continues, yet market share gains by one service are not necessarily coming at the expense of others. Cord cutting does continue to negatively impact the cable bundle.

Another trend that we have observed management teams talking about more frequently is the importance of paying attention to environmental, social and governance (ESG) factors. Consumer companies have been focused on their environmental stewardship, and now other sectors are joining the dialogue as well—financials, utilities and technology firms, to name a few. Many management teams believe ESG investing will play an important role in the future of their business and are touting their virtues on those metrics.

In technology, an area of notable strength over the last several years, solid corporate spending trends continue. Management teams are prioritizing spending on cloud-based technology as business processes and customer experiences move online. Companies are fast-tracking expenditures related to modernizing their business models to incorporate omnichannel purchases and delivery. In addition, data growth is increasing exponentially and storing and analyzing this information is a top priority.

Business confidence has improved further resulting from the Phase One trade resolution with China as well as Brexit coming to fruition without major upheaval. Both events removed a source of uncertainty for management teams. Resolving these outstanding questions has allowed companies to move forward with plans. Some management teams have also commented about positive trends in the construction sector which is another positive indicator of business confidence.

Companies with exposure to China (either for revenue or on the input cost side) are issuing guidance that they may be at risk for downward revisions due to the potential outcomes related to the coronavirus COVID-19. Management teams generally expect a negative impact from the virus to dampen quarterly results but anticipate the impact to be short lived. One sector which has been particularly affected by the virus is energy, where a substantial portion of oil demand comes from China. Another group which is disproportionately impacted by the virus is retailers with a presence in China. Many of these companies have closed local stores or paused production in the region until conditions improve.  

In summary, many trends from the recent past continue to play out in early 2020. Corporate management teams continue to report that consumers are strong, and recent commentary on business investment and confidence may be improving somewhat. The relatively new outbreak of the coronavirus presents a near-term risk to some companies and we will continue to monitor its progression. However, the general tone regarding the outlook for business has been one of optimism.