Monday Market Review January 13, 2020
Economic data for the week included a stronger than expected ISM non-manufacturing/services survey. While the December employment data came a bit below expectations, it still showed decent growth.
U.S. equity markets fared positively, as geopolitical strains with Iran tempered, outperforming foreign developed market stocks, but underperformed emerging markets. Bond markets were little changed on net. Commodities lost ground as crude oil prices plummeted with Middle East U.S.-Iran de-escalation and high global supplies.
U.S. stocks fared well for the first full week of 2020, as concerns over Iranian retaliation from the U.S. drone strike the prior week were partially alleviated from tempered rhetoric from the administration. The DJIA reaching 29,000 was another potentially meaningful sentiment mile marker. Potential for another open-ended Middle East military conflict remains extremely unpopular among the American electorate, and uncertainty over carryover effects has the potential for disrupting financial markets, as all wars have tended to do historically. The downing of a commercial jet by the Iranian government appears to have diverted attention elsewhere for the time being as protests there spread. This coming week, markets look forward to the formal signing of phase one of the U.S.-China trade deal.
By sector, communications and technology led with gains over 2% for the week, led by gains by large constituent Apple due to stronger-than-expected foreign iPhone sales, while energy fell a percent to lag all others, in keeping with sharply lower oil prices. Real estate lost ground slightly, with U.S. names outperforming foreign, which lost a percent.
Foreign stocks in developed markets appeared to be held back by a stronger dollar, with weak returns in the U.K. especially, while emerging markets gained sharply. Similar to the relationship in the U.S., services surveys continued to show growth (albeit to a lesser degree than domestic results), while manufacturing continued to contract.
U.S. bonds were little changed on the week, in keeping with a stable treasury yield curve. Long-term treasuries fell a bit as longer-dated bond yield ticked slightly higher, while investment-grade and high yield corporates both eked out small positive returns. A stronger dollar resulted in negative returns for low-yielding international developed market government bonds, while local currency emerging market debt earned the highest returns of any bond group on the week.
Commodities fell overall for the week, led by a sharp drop in energy prices, while all other groups gained slightly. While natural gas prices rose due to weather concerns, the price of crude oil declined by over -6% to just under $59/barrel—it’s worst week in six months. Interestingly, despite a small tick of price movement occurred in response to the U.S.-Iran drone strike and later Iranian missile attack on a U.S. military base in Iraq, overall volatility appears strangely muted compared to eras past. The overall story continues to be a glut of global oil inventories, which has overwhelmed other potential triggers.
(+) The ISM non-manufacturing index for December rose by 1.1 points to 55.0, which slightly outperformed the 54.5 level expected. Under the hood, business activity gained by over 5 points to further expansionary territory, while supplier deliveries increased slightly to also remain expansionary. Prices paid were flat, while new orders and employment each declined several points, but also remained in growth mode. Overall, this metric continues to point to solid services sector growth, and looks to remain fairly insulated by recent volatility in the manufacturing space.
(0) Factory orders for November fell by -0.7%, which was a tenth of a percent less negative than forecast.
(+) The trade balance for November fell by -$3.8 bil. to -$43.1 bil., tighter than the -$43.6 bil. level forecast by consensus. Imports fell by -1% overall, with declines in both petroleum and non-petroleum components, although a -3% decline in the former was more extreme than in the latter. Exports rose by 0.7% on the month, led by gains outside of energy, as energy exports fell by -4%.
(0) Initial jobless claims for the Jan. 4 ending week fell by -9k to 214k, below expectations calling for 220k. Continuing claims for the Dec. 28 week, on the other hand, rose by 75k to 1.803 mil., above the median forecast of 1.720 mil. As has been the case in recent years, it seems seasonal adjustments might be playing a role in skewing year-end claims results, which include the Christmas and New Year’s weeks. Aside from this, though, claims levels remain low and indicative of a continued strong employment market.
(+) The ADP employment report of private payrolls showed a gain of 202k jobs in December, outperforming expectations calling for 160k, in addition to a sizable revision higher for November. Services jobs rose by 173k, with trade/transports/utilities serving as the primary gaining sector. Goods-producing jobs rose by 29k, as a 37k increase in construction offset declines in manufacturing.
(0/+) The employment situation report for December was a bit weaker than expected on a headline payroll side, but remain generally robust by other metrics. For the most part, the pace of improvement has decelerated, which is not surprising at this point in the cycle, when conditions are less favorable for further dramatic improvement. At the same time, the steady positivity in labor markets provides another reason for the Fed to stay put.
Nonfarm payrolls rose by 145k, which disappointed relative to the consensus expectation of 160k, and last month’s strong 256k showing. This also included minor revisions downward for the two prior months. During December, retail jobs rose by 41k to lead the pack, along with leisure/hospitality, while gains in business services and health care disappointed a bit. Construction jobs rose by 20k, along with weather improvement, while mining and manufacturing each saw a decline in jobs for the period. For 2019 as a whole, payroll employment rose by 2.1 mil., which was down a bit from 2018’s increase of 2.7 mil.
The unemployment rate was unchanged at 3.5%, which appears to be a near-term bottom for the series, with no change in the labor force participation rate for the month. The overall level remains lower than the 3.9% rate a year ago, which is a positive at least based on one classic recession-tracking indicator. The U-6 underemployment measure fell by -0.2% to reach 6.7%—an all-time low over three decades of data. The household survey component of the report showed an employment gain of 267k.
Average hourly earnings rose by 0.1% to $28.32, under expectations calling for a 0.3% increase, and bringing the change over the last year to 2.9%. The average workweek was also unchanged at 34.3.
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.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.