Economic Data Watch and Market Outlook
The end of 2019 saw the S&P 500 return 31.49% (including dividends), its best showing since 2013, and along with the DJIA and NASDAQ achieved new all-time highs. Pushing equity indices to new highs was word from President Trump that China was sending “high level representatives” to Washington to sign the Phase One trade deal at the White House on January 15th. This euphoria soon turned to worry as U.S. ISM Manufacturing data came in for December at 47.2, which is a recessionary reading for 12.0% of the economy. Fortunately, the ISM Services data which accounts for 88.0% of the economy posted a solid 53.9. Adding to the market’s concern was news that a U.S. airstrike killed the top military general of Iran, whom Secretary of State Mike Pompeo said reliable intelligence showed he was planning “imminent attacks” against America. News of the airstrike sent the S&P 500 down -0.71% for the day, well off the day’s lows. And though we await a potential retaliatory strike as threatened by Iran’s leadership, professional traders see any pullback as a buying opportunity.
As we enter next week’s trading sessions, we can expect bouts of market volatility as Middle East tensions have risen and the market’s attention will now turn to U.S. and China negotiations regarding Phase Two of the trade deal. Phase Two negotiations are expected to be contentious as it will deal with the difficult issues of intellectual property violations, forced technology transfer and government subsidies for China’s SOE’s. Also, in the background is a possibility of China not abiding by the Phase One deal, and any dispute could lead to a re-imposition of recently lifted tariffs. But let’s not forget that the U.S. Fed and ECB are still in an accommodative mode and the BOC just lowered their reserve requirement for commercial lenders, un-leasing $100 billion into the Chinese financial system. This increase in global liquidity should provide support for risk assets.
In turning to next week’s economic calendar, we will get the important releases for Factory Orders, ISM Services and the all-important Jobs data at the end of the week. We kick off Tuesday with November Factor Orders where the estimate that new orders for factory goods fell 0.8% in November while related shipments increased 0.2% and inventories rose 0.3%. Also, out on Tuesday is the ISM nonmanufacturing survey’s composite increased 0.6 points to 54.5 in December. There has been some improvement in recent months in several service sector surveys after a period of weakness.
On Friday, the Street is estimating nonfarm employment increased 125,000 in December with the unemployment rate holding at 3.5%. The average work week is projected to have held at 34.4 hours between November and December while average hourly earnings increased 0.2% (3.0% on an annual basis).
The Week In Review
U.S. Equities
U.S. equity markets saw the S&P500, DJIA and NASDAQ post record closes for the year as the release of a definitive date of January 15th for the signing of the Phase One U.S./China trade deal sent equity prices higher.
a) Dow Jones -0.05%, MTD +1.87%, YTD +25.34 b) S&P 500 +0.25%, MTD +3.02%, YTD +31.49% c) Russell 2000 -0.26%, MTD +2.88%, YTD +25.52%
Drivers: I) U.S. equity market indices rose to all-time highs last week as President Trump tweeted “I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15. The ceremony will take place at the White House. High level representatives of China will be present. At a later date I will be going to Beijing where talks will begin on Phase Two!”
II) The December ISM manufacturing survey did not provide a sign that factory conditions were stabilizing. The ISM manufacturing index, which measures the rate of change in growth across manufacturing, unexpectedly fell from 48.1 in November to 47.2 in December. The sub-components were mostly weaker than in November as production dropped from 49.1 to 43.2, the lowest since 2009. New orders declined in December while inventories were slightly higher but remained below their neutral threshold of 50.
III) The S&P CoreLogic Case-Shiller® Home Price Index was steady in October, as measured by the S&P 20 city index. The seasonally unadjusted index increased 0.1% in October and was up 2.2% from October 2018. The year-over-year gain is essentially unchanged from September, which posted a 2.1% appreciation. Of the 20 metro areas in the index, Phoenix, Tampa FL and Charlotte NC had the strongest year-over-year appreciation.
IV) The Conference Board Consumer Confidence Index fell versus expectations in December, but there is little concern as sentiment remains solid. The Conference Board index fell from 126.8 in November to 126.5 in December. Expectations fell while the consumers’ assessment of present conditions improved in December. The labor market differential, or the difference between the share of respondents saying jobs are plentiful and those saying jobs are hard to find, widened. Planned purchases improved in November, including autos and homes.
V) Equities Year to Date were higher with Large-Cap, Value, Technology and Information Technology leading equity price performance. The laggards on the year were Small-Cap, Growth, Energy and Healthcare.
Capitalization: Large Caps +2.89% (YTD +31.43%), Mid-Caps +2.29%(YTD +30.54%) and Small Caps +2.88% (YTD +25.52). Style: Value +3.08% (YTD +25.60%) and Growth +2.64% (YTD +24.70%). Industry Groups: Technology +4.47% (YTD +49.97%), Information Technology +4.46% (YTD 49.75%), Financials +2.67% (YTD +31.88%), Industrials -0.07% (YTD +29.11%), REITs +1.29%(YTD +28.80%), Consumer Discretionary +2.83% (YTD +28.43%), Communication Services +2.41% (YTD +28.03%), Consumer Staples +2.47% (YTD +27.44%), Utilities +3.41%(YTD +26.04%), Materials +3.00%(YTD +24.19%), Healthcare +2.90% (YTD +18.11) and Energy +3.07% (YTD +8.61%).
European Equities
The MSCI Europe index rose last week by +0.62% as market’s look forward to further developments involving U.S./China trade and “Brexit”.
Drivers: I) The German unemployment rate was unchanged at 5.0% in December. After dropping by a downwardly revised 14,000 in November, the number of unemployed picked up again by 8,000. The labor market performed well in 2019 despite a weakening economy. The labor market remains strong, though December’s flash composite PMI showed continued weakness picture. Downside economic risk still exists , but there are not any expectations that the jobless rate will increase substantially in 2020.
II) Spain’s GDP grew by 0.4% during the third quarter ending in September, unchanged from the second quarter. Domestic demand drove growth over the quarter, contributing 1.8%. Household consumption and investment rose from the previous quarter. External demand contributed only 0.1%, as exports declined. On a yearly basis, output grew 1.9% in the third quarter, just below the 2% gain posted during the second quarter. The Street is projecting a solid annual growth of 2.0% for Spain for 2019.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was higher by+0.63% for the week (MTD +3.91%, YTD +23.77%).
Asian Equities
Asian equity markets finished the year mostly higher, due to expectations of stronger global economic growth in 2020 and the planned signing of an interim U.S./China trade agreement. The Dow Jones Asia Index declined by -0.48% for the week (MTD +4.54%, YTD +10.87%)
Drivers: I) China’s manufacturing activity was unchanged in December at 50.2. For the past two months, the index has remained in expansion mode after six consecutive months in recession territory. Over the next few months, economists expect manufacturing activity will improve with the completion of the Phase One trade deal. Market participants though, will need to see solid progress in settling still outstanding trade issues between China and the U.S. before a sustained recovery can take place.
II) South Korea’s retail sales improved in November, as the seasonally adjusted index rose by 3% on a monthly basis following a 0.5% decline in October. This translated to an annual increase of 3.7% in November following a 2.1% decline in October. The improved domestic sales are a positive development that was supported by the year-end shopping festival that lasted through most of November and boosted the return of retail sales growth for the first time since August.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -0.52% (MTD +1.73%, YTD +20.72%), the Hang Seng Index rose by +1.04 (MTD +7.55%, YTD +9.69%) and the Shanghai Composite gained +2.95% (MTD +6.20%, YTD +22.30%).
Fixed Income
Treasury yields fell last week as the “risk off “ trade was pervasive at week’s end due to the U.S. airstrike carried out against an Iranian military general.
Performance: I) The 10-year Treasury yield was lower last week ending at 1.789% down from 1.878%. The 30-year yield fell last week finishing at 2.246 dropping from 2.310%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.23% last week, MTD -0.07% and YTD +8.72%. The Bloomberg Barclays US MBS TR was higher by +0.24% last week, MTD +0.28% and YTD +6.35%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.11%, MTD +2.00% and YTD +14.32%.
Commodities
The DJ Commodity Index fell last week declining -0.69% but was higher month to date +5.38% (YTD +10.12%). Commodity prices ended the year higher as commodities across precious metals, industrial metals, energy and agriculture rose on the back of completion of the Phase One trade deal, and expectations for improved global economic growth in 2020.
Performance: I) The price of oil fell through year end by -1.19% to close at $61.06 but rose month to date in December by +10.17% (YTD +34.46%). Oil prices jumped higher on rising tensions in the Middle East and expectations for increased global economic growth fostered by accommodative central bank policy and hopes for improvements in global trade.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.54 ending at 96.39 for the week (MTD -1.91%, YTD +0.22%). The USD fell last week as the U.S./China Phase One deal inched closer to completion and the U.S. Fed taking a neutral stance on rates for 2020.
III) Gold advanced for the year due to lower interest rates, geo-political uncertainty and a weakening of the USD at the end of the year. Gold was higher by +0.34% last week, climbing to $1523.1 (MTD +3.58%, YTD +18.87%).
Hedge Funds
Hedge fund returns in December and year to date finished higher with all of the core strategies, Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +1.27% MTD and up +8.68% YTD.
- Equity Hedge has risen by +1.22% MTD and is up +10.71% YTD.
- Event Driven is higher MTD +2.06% and is higher YTD +9.99%.
- Macro/CTA has risen by +0.57% MTD and is up +5.12% YTD.
- Relative Value Arbitrage has advanced by +0.99% and is up +6.54% YTD.
- Multi-Strategy is up MTD at +1.01% and is higher by +6.22% YTD.
Data Source: Haver Economics
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