Weekly Commentary (01/13/20) – Markets up as Tensions Ease

January 13, 2020

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