Monday Market Review January 6, 2020
Economic data for the turn of the New Year included mixed results in manufacturing, yet stronger construction and housing data, as well as continued strength in labor featured by low jobless claims.
U.S. and foreign equity markets ended the week flat to downward, on the heels of geopolitical turmoil in the Middle East by the end of the week. Bonds fared well, as interest rates declined along with investors seeking safety in such an environment. Commodifies ticked higher along with higher crude oil prices.
U.S. stocks experienced a mixed year-end and opening to 2020, with finalities over phase one of the U.S.-China trade agreement extending market optimism toward New Year’s. But, by the end of the week, a surprise geopolitical element put a wildcard in the mix due to the U.S. military action in Iraq that resulted in the death of a well-regarded Iranian general—naturally raising tensions between the two nations and unsettling global markets. By sector, gains in industrials and energy were offset by declines in materials, consumer staples and healthcare—the latter being generally defensive groups.
Foreign stocks fared similarly to U.S. equities, with Japan ending the week worst in local terms, but best when adjusted for a stronger yen, resulting from a ‘safe haven’ flows. This was followed by negative returns in Europe and the U.K., in keeping with continued weak manufacturing sentiment results for both. Emerging market stocks ended with the fewest losses on the week. Sharp gains in China followed the central bank’s lowering of bank reserve requirements—a stimulative measure to offset damage caused by trade tensions.
U.S. bonds ticked higher along with the Middle Eastern friction, with long-term rates heading lower by over ten basis points. This benefitted treasuries primarily, although all other domestic bond groups, including high yield and floating rate bank loans, also gained for the week. Foreign developed market bonds also fared well, with little change in the value of the dollar, while emerging market debt fell back.
Commodities ticked slightly higher on the week, led by energy, as the other sectors ended the week flat to negative. Offsetting a -5% decline in natural gas, the price of crude oil rose by 2% to over $63/barrel, largely on the geopolitical event between the U.S. and Iran. The muted market response was interesting, compared to years past where such military action would have generally meant a much more meaningful knee-jerk response higher for oil prices.
(-) The ISM Manufacturing Index for December fell by -0.9 of point to 47.2—below the forecasted gain to 49.0. Underlying components were weaker as well, with production and new orders falling further into contraction—in fact, their lowest levels in a decade. Employment also declined by a few points deeper into slowdown. On the other hand, supplier deliveries rose further into expansion in the strong mid-50s, as did prices paid along with higher petroleum prices. This wasn’t a great report, but in keeping with recent month-to-month weakness in the segment, which, considering decent results in other areas, could be affected a bit by energy production issues as well as the recent setback for Boeing.
(0/+) On the other hand, the Chicago PMI Index rose by 2.6 points in December to a four-month high of 48.9. This remained in contractionary status, but certainly less so than in previous months. Under the hood, supplier deliveries and prices paid increased further into expansion, and production improved to a less contractionary reading. Order backlogs and inventories also improved by several points, to upper 40’s readings. On the other hand, employment and business sentiment fell by a few points, and remained contractionary. While remaining lower than expected, and in slowdown, this overall key manufacturing reading continues to offer some promise that conditions might be improving.
(+) Construction spending for November rose 0.6%, beating consensus expectations calling for a 0.4% gain. This included revisions to data for several prior months, which have experienced continuous growth through the latter half of 2019. Private construction growth was led by a percent increase in single-family, while multi-family lagged, on a flat to declining trend. Public construction rose nearly a percent, mostly in the state/local infrastructure category.
(+) The FHFA house price index for October rose 0.2%, which fell short of the 0.4% expected. Prices rose in all but two regions during the month, led by the southern plains states and deep south, each up 0.7%, while states near the Great Lakes declined by a half-percent. Year-over-year, this index rose by 5.0%, which remains above its long-term average pace in real growth terms.
(+) The S&P/Case-Shiller home price index, which covers a more concentrated sampling of the 20 largest urban areas, rose 0.4% in October, which was a tenth above expectations. Prices rose in 18 of the 20 cities, led by Atlanta, LA, and Seattle all up 0.7%, while San Francisco declined by a few tenths. On a year-over-year basis, however, the index only rose by 2.2%, which equated to a minimal real yield closer to long-term expectations and certainly below the exceptional pace of the past seven years.
(0) Pending home sales for November rose by 1.2%, which fell a bit short of the 1.4% increase expected. Regionally, sales in the West rose by over 5%, while sales in the South and Northeast declined slightly. The year-over-year rate of change improved by over a percent to 5.6%. Overall, this bodes well for existing home sales results in the coming months.
(+) The advance goods trade balance for November tightened by -$3.6 bil. to -$63.2 bil., compared to the -$68.7 bil. level forecast by consensus. Lower imports of goods were a primary factor, which is likely related to the imposition of Chinese tariffs, considering that this has occurred for several months in a row in a correlated trend. Exports ticked higher, led by strength in capital goods and autos.
(-) The Conference Board’s index of consumer confidence for December fell by -0.3 points to 126.5, from an upwardly-revised previous month figure, missing target estimates calling for 128.5. Consumer assessments of present conditions rose by over 3 points, but were offset by a decline of the same magnitude for future expectations. The labor differential measuring job search ease also rose by over 2 points.
(0) Initial jobless claims for the Dec. 28 ending week fell by -2k to 222k, just above expectations calling for 220k. Continuing claims for the Dec. 21 week, on the other hand, rose by 5k to 1.728 mil.—above expectations calling for 1.680 mil. No anomalies were reported, but at year-end, seasonal adjustments become a factor in these claims reports, so results tend to be more volatile than during the rest of the year. Otherwise, claims remain very low and indicative of a strong labor market, with low layoff activity.
(0) The FOMC minutes from the December meeting were in line with expectations, considering that no changes to policy took place. Overall growth was seen as ‘moderate’, while labor markets and consumer spending were described as ‘strong’. The most notable components were lowered risks to the downside, which included lowered chances of a recession, although there continued to be concerns over ‘muted’ inflation measures. There appears to be a bit more consensus in the committee as this point, but balanced views about wanting to keep stimulus intact to combat that low inflation, while other appeared more concerned over rates staying too low for too long potentially exacerbating financial imbalances.
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.