Markets continued to grind to new record highs last week due to positive bank earnings and commentary, another round of analyst price target revisions, and the official agreement of the China-US phase one trade deal.
For the week, the DJIA advanced 1.84% while the S&P 500 gained 1.99%. The tech-heavy Nasdaq was up 2.29%. International markets were also strong as the MSCI EAFE index gained 0.86% while emerging market equities (MSCI EM) increased 1.17% (January – March is a seasonably strong period for emerging market equities). Small company stocks, represented by the Russell 2000, jumped ahead by 2.54% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week flat as the yield curve remained roughly the same. As a result, the 10 YR US Treasury closed at a yield of 1.84% (up ~1 bps from the previous week’s closing yield of ~1.83%). Gold prices closed at $1,558/oz. Oil prices pulled back under $59 per barrel last week as oil remains mostly range bound due to sufficient supply and tepid demand.
Economic data released last week was mostly in-line with expectations. The U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) advanced 0.2% in December, missing expectations of a 0.3% advance. CPI has increased 2.3% year over year. The BLS also reported that the Producer Price Index (PPI) for final demand edged higher by a modest 0.1%. Inflation remains well under control and of little risk to the market. Retail and food services increased 0.3% (month over month) in December to $529B, matching expectations. It increased 3.6% in 2019 showing consumer’s willingness to continue to spend and companies’ ability to pass on modest price increases.
We acknowledge that valuations on the market are elevated at current levels and momentum clearly has control of the market following a very strong 2019. Earnings season kicked off last week and so far the results have been positive versus consensus. Earnings reports will continue this week with 39 companies comprising the S&P 500 scheduled to report results. Over the next few weeks, earnings will be critically important for the positive momentum to continue. We continue to recommend investors stay close to their long-term target asset allocations and with a slight defensive bias.
“Life’s most persistent and urgent question is, ‘What are you doing for others?’ “ – Martin Luther King, Jr.
Markets advanced last week as geopolitical tensions between the U.S. and Iran eased. Also helping the market move higher were multiple stock upgrades and mostly better-than-expected economic news.
For the week, the DJIA advanced 0.67% while the S&P 500 gained 0.98%. The tech-heavy Nasdaq jumped 1.76% following the upgrade of several FANG stocks and other bellwether tech names. International markets were mixed. For the week, the MSCI EAFE index (developed markets) inched lower by 0.08%% while emerging market equities (MSCI EM) jumped 0.88% (January – March is a seasonably strong period for emerging market equities). Small company stocks, represented by the Russell 2000, finished lower by 0.18% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week slightly lower as the yield curve continued to steepen. As a result, the 10 YR US Treasury closed at a yield of 1.83% (up ~3 bps from the previous week’s closing yield of ~1.80%). Gold prices closed at $1,557.50/oz – up 0.54% on the week. Oil prices fell 6.35% on receding geopolitical tensions.
Economic news released last week confirmed a resilient jobs market, moderate economic output and still moderate inflation. On Tuesday, the Institute of Supply Management (ISM) reported that the non-manufacturing index (services) increased 1.1% in December to 55.0%, ahead of consensus of a 54.3% level. New orders for manufactured goods in November declined 0.7% (slightly better than the expected 0.8% drop) as reported by the Commerce Department on Tuesday. On Wednesday, ADP released its employment report for the month of December. The report showed a 202,000 increase in private sector jobs, beating expectations for 160,000 additional jobs. On Thursday, the Department of Labor reported weekly initial jobless claims (for the week ending January 4) of 214,000, 6,000 below consensus of 220,000. Layoffs remain quite low and reflect a resilient labor market. On Friday, the Labor Department reported that 145,000 jobs were added in December – slightly below expectations for 160,000. Nevertheless, the unemployment rate held firm at 3.5% while the labor force participation rate was a 63.2% (close to its highest rate in over 6 years). This week will see the release of CPI, PPI, retail sales, industrial production, consumer sentiment, the Philly Fed survey and the Empire manufacturing survey. On the trade front, the U.S. and China are expected the sign the phase one trade agreement this week (fingers crossed …).
Economic and market fundamentals remain reasonable. We suggest investors stay close to their long-term target asset allocations with a slight defensive bias. The slight defensive bias is warranted in that U.S. markets have moved nicely higher over the past year and haven’t experienced a 1% daily pullback in over three months.
“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin
Following 2019’s strong gains and momentum, stocks began 2020 and last week with a sense of optimism. However, by the end of the week, markets were rattled by increased tension in the Middle East resulting from the death of Iranian General Soleimani from a U.S. drone strike. Stocks finished down on Friday erasing gains from earlier in the week. For the week, the S&P 500 was off -0.1%, the DJIA and MSCI EAFE were flat with emerging equities up 0.48%. As a result of the increased volatility, investors sought safety in government bonds and gold. The rate on the 10 year U.S. treasury fell from 1.88% to 1.79% and gold rose 2.15% for the week. The best performing equity sectors last week were industrials, energy and technology.
Economic reports scheduled to be released this week include both the ISM and Markit non-mfg. Purchasing Manager’s Indexes (PMI), international trade, and the monthly jobs report. Geopolitics will likely grab headline news especially relations regarding Iraq and Iran. For 2020, most economic projections look for the year to have modest GDP growth of around 2% with no recession. A well-diversified portfolio should help you weather a volatile period in the markets.
Let’s make it a good year!
“We must stop politics at the water’s edge.” – Arthur Vandenberg
ND&S Weekly Market Commentary (1.27.20) – The Threat of Virus
January 27, 2020
During the holiday shortened week, investors and traders were shocked by the news of China quarantining two cities and locking down nearly 18 million people to prevent the coronavirus from spreading. As a result, the Dow Jones Industrials (DJIA) declined 1.2%, the S&P 500 dropped 1.0% and the tech-heavy NASDAQ also slipped 0.8%. Emerging markets stocks (MSCI EM) which includes China, slid 2.4% and developed international (EAFE) lost 0.6%.
The global growth fears as a result of the virus have also hit commodities especially metals, oil and refined fuels. On Friday, copper prices recorded their largest weekly decline in five years. For the week, the price of US crude oil plunged over 7.5% to $54.14 per barrel. Gold closed the week 1.3% higher as fears of a global economic slowdown sent investors to safe haven assets.
Corporate earnings for the 4th quarter of 2019 have mostly come in ahead of analysts’ expectations. Over 70% of the companies that have reported beat their expectations according to FactSet. The sector dragging down earnings results is again energy. Over the last 5 years, energy stocks in the S&P 500 are down roughly 24% and are by far the worst performing sector.
US Treasury yields continued their downward trend as a result of concerns about the coronavirus outbreak triggering a flight to safety. The 10-year U.S. Treasury finished at 1.70% down from 1.92% at the beginning of the year.
On the economic front, December existing home sales climbed 3.6% to 5.540 million, surpassing the 5.430 million consensus. Though jobless claims rose modestly to 211,000, they were still lower than the 215,000 expected. The January IHS Markit Flash U.S. Manufacturing PMI fell to 51.7 from a reading of 52.4 in December. However, the PMI reading on Services activity advanced to 53.2 from 52.8.
This coming week we will see major economic data reported: Q4 GDP, new home sales, durable goods orders, consumer confidence and personal income/consumer spending. Leading companies, Apple, Facebook, Microsoft and many more will be reporting their quarterly results.
In addition to the impeachment hearing, geopolitical conflicts and the virus threats to the global economy, there are concerns that market valuations are a bit extended. The forward price-to-earnings (PE) ratio of 18.5 is the highest since June 2002, aside from a brief period in early 2018. We recommend raising cash levels for foreseeable needs while maintaining longer term asset allocations. Remember that dividend growth will continue to provide substantial returns for patient investors. In the fourth quarter investors added $10 billion to dividend exchange traded funds and we expect dividend focused investing will continue.
“Courage is an inner resolution to go forward despite obstacles” – Martin Luther King, Jr.