Monday Market Review December 16, 2019
Economic news for the week included the Federal Reserve keeping interest rates unchanged following their monetary policy meeting, as expected. Consumer inflation came in slightly higher than forecasts, while producer prices disappointed, and retail sales were positive but below expectations.
U.S. and foreign equity markets both gained ground with an announced preliminary U.S.-China trade deal, which boosted sentiment. Bonds were mixed to slightly higher, as interest rate policy remained consistent. Commodities gained across a variety of sub-sectors, including crude oil, due to planned OPEC production cuts.
U.S. stocks gained slightly during the week, with a bump on Thursday following a Presidential tweet that the U.S. and China were ‘very close’ to a ‘big deal’, which implied a conclusion to Phase 1, and a deferral of tariffs slated to begin Sunday, Dec. 15 (which would have included all remaining Chinese imports not yet under tariff). These rumors were realized later in the week, and while not all prior tariffs were completely wound down, the Sept. 1 round representing $120 bil. in imports was reduced from a 15% down to 7.5%. China did, however, agree to ramp up U.S. farm good purchases as well as other concessions. The ‘other’ concessions apparently include issues with intellectual property, although details about the agreement have been fuzzy, and there is a good deal of legal review needed prior to implementation.
By sector last week, technology and consumer discretionary stocks fared best, with gains of a percent. This would be expected upon positive news of a trade deal, due to stronger outcomes for end markets and supply chain linkages. Communications services was a negative performer for the week, as was real estate. Interestingly, the earnings picture for the S&P looks to be fairly flat this year, with expected growth of just under a half-percent in 2019 (per FactSet), which pales in comparison to earnings growth of 20% in 2018 and 11% in 2017, as well as the 9% average annual growth over the past decade. While the easy year-over-year comparisons based on tax cuts have gone away, the news isn’t all bad. The headline flat growth masks more extreme results for the outliers—mainly utilities and health care, where earnings are up a more normalish 8%, while energy and materials profits are down -28% and -16%, respectively. Revenue growth patterns look similar, with the broader S&P expected to increase by 4% for the calendar year. To perhaps no surprise, companies with high levels of domestic revenue exposure have been faring positively on net, in terms of revenue and earnings growth, while those with a predominant share to international markets are expected to report declines in both top- and bottom-line measures. Expectations for 2020 earnings growth remain mixed, but tend to be clustered cluster in the mid to high single-digits for now.
Foreign stocks were the strongest performers on the week, with help from a relief rally in the U.K., along with a stronger British pound versus the dollar. The British election resulted in a decisive victory for the Boris Johnson-led conservative party; in fact, it was the strongest Tory showing since Margaret Thatcher’s win in 1987. This paved the way for an accelerated Brexit process, which has been promised for completion in early 2020. However, due to the complicated and contentious trade negotiations expected, many peg late 2020 as much more likely as a final ending point. European equities also gained, as Brexit progress was taken positively, as was a continuation of the pro-stimulus ECB regime, with no interest rate changes. Broadly, foreign stocks, including Japan and emerging markets, also took the U.S.-China trade deal news quite positively, especially in China and Korea directly. Mexico fared well upon news of the replacement for NAFTA, the U.S.-Mexico-Canada (USMCA) trade compact, progressing to final stages of approval by the U.S. Congress.
One piece of market news was the IPO for Saudi Aramco, which is the largest such offering in history, raising $25.6 bil., although the capital raised failed to meet expectations. Based on its first day of trading, and only a fraction of the company being offered, its implied value is nearly $1.9 trillion—the most valuable public company in the world. The Saudi stock market has expanded in size exponentially, with this addition, although it has recently graduated from frontier market into emerging market status. This IPO is part of a larger plan from the Saudi royalty to both raise money and diversify the economy into other areas than fossil fuels (as oil revenues have been in a decline).
U.S. bonds gained a bit on the treasury side as interest rates ticked down the yield curve, in keeping with the Fed’s sentiment about interest rates remaining contained—although this wasn’t a surprise. While investment-grade corporate bonds lost ground, high yield and bank loans fared positively, in keeping with other risk assets. Foreign bonds experienced similar results, benefiting from a weaker dollar, with gains in U.K. bonds especially due to a stronger pound. Emerging market bonds also fared positively in a pro-risk week.
Commodity prices generally ticked higher last week, with help from a weaker dollar. Every sub-sector gained ground, in similar magnitude. The price of crude oil rose over a percent on the week, to just over $60/barrel, which offset the -2% drop in natural gas prices. Optimism over trade resolution and recent announcements of OPEC production cuts into next year, have led to hopes for better member nation compliance.
The FOMC meeting last week, as noted previously in the week, resulted in no change in policy. This matched market expectations that the Fed is finished for the time being, mentioning overall growth being ‘moderate’, and unemployment ‘low’. Inflation remains among their primary issues, however, with ongoing concerns about levels running below 2%, along with ‘global uncertainties’ in terms of their top worries behind the scenes.
The summary of economic projections, released on a quarterly basis, showed little change in economic growth, but did indicate a lower unemployment rate, and a predicted eventual movement in the fed funds rate back up above 2.0%—further toward the long-term ‘neutral’ rate of 2.5% within the next few years. However, these projections, notably the dot plot interest rate chart, represent only a snapshot of today’s views, so have tended to not be as useful or accurate as some had hoped in providing a roadmap for policy. The case in point is that, just over a year ago, Fed members projected several hikes this year as opposed to the three cuts they ended up implementing.
Retail sales for November rose 0.2% on a headline level, which disappointed relative to expectations calling for a gain of 0.5%, in addition to several downward revisions. The timing of Thanksgiving, and ‘Cyber Monday’ (into December) may have also played a role, considering the growing significance of these single retail days. The headline number was led by increases in both auto and gas station sales. On a core/control level, sales rose a less robust 0.1%, which also lagged expectations calling for 0.3%. Strength originated from the categories of non-store/online and electronic/appliance, each of which gained nearly a percent, while personal care and clothing/accessory fell back by an equivalent amount. Year-over-year, retail sales are up over 3% on a headline level, and nearly 4% on the core side.
Sales are closely watched in the weeks prior to the Holidays, and December results look to be decent anecdotally, based on early unofficial reports. In line with broad measures of consumer sentiment, there are a handful of factors that have tended to support strong Holiday sales—the most important of which being low unemployment, and a lack of consumer debt stress as measured by delinquencies, etc.
The producer price index was unchanged in November on a headline level, falling below expectations calling for an increase of 0.2%. Subtracting volatile food and energy prices, PPI declined by -0.2%, which also bucked expectations of a small increase. During the month, energy and food prices both increased by a rounded 1%, as did other commodity materials, which helped buoy the headline PPI number. Other areas fell, such as medical care, and the producer index-specific segments of trade services, and retail margins. On a year-over-year basis, headline PPI rose by only 1.1%, and core by 1.5% (the slowest pace in over three years), which is far below other inflation measures and points to subdued price pressures from this intermediate channel. The bulk of prices have been on the services side, with goods prices barely budged from a year ago, or even down, based on some measures.
The November consumer price index (CPI) rose an upwardly-rounded 0.3% on a headline basis, and 0.2% on a core level, removing the impact of food and energy—each about in line with expectations. Under the hood, medical services costs, housing (via rent and owners’ equivalent rent), as well as apparel, internet service and used car prices all gained somewhat. Year over year, unadjusted headline and core CPI rose 2.1% and 2.3%, respectively. Adjusting for the fact that CPI runs at a higher level than the Fed’s preferred PCE measure, due to its composition, inflation looks to not far out of line with the Fed’s policy target, despite ongoing concerns by policymakers. However, as we’ve noted, various sub-groups within the index are experiencing quite different inflation dynamics.
Import prices rose 0.2% in November, reversing course from the prior month and on par with expectations, as well as in keeping with other inflation measures for that month. The increase was the same on headline result and core ex-petroleum basis, despite an expected small decline for the latter. Under the hood, petroleum and industrial supplies prices each rose a percent for the month, while those for food and capital goods fell a bit.
Initial jobless claims for the Dec. 7 ending week rose by a dramatic 49k to 252k, surpassing the 214k level expected. Continuing claims for the Nov. 30 week, on the other hand, fell -31k to 1.667 mil., below the 1.678 mil. expected. It’s likely that the extreme movements were due to the short Thanksgiving week, as the reporting was broad among the largest states, and no single anomalies were reported. This has been a tendency seen some prior years, especially when the holiday fell later in the month.
Nonfarm productivity growth for the third quarter was revised up a tenth of a percent, to a decline of -0.2%, but not quite upward to the -0.1% expected by consensus. Year-over-year productivity is now 1.5% higher. Unit labor costs, on the other hand, were revised down by -1.1% to 2.5% for the quarter, below forecasts of a minimal expected change to 3.4%. This decelerated the year-over-year rate down to 2.2%.
Have a good week.
Ryan M. Long, CFA
Director of Investments
FocusPoint Solutions, Inc.
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.