Weekly Market Commentary - November 18, 2019

U.S. EQUITIES

U.S. equity markets once again hit new all-time highs as U.S. officials Larry Kudlow and Wilbur Ross made positive comments on trade, and U.S. retail sales continue to grow at a steady pace.

a) Dow Jones +1.24%, MTD +3.76%, YTD +22.64 b) S&P 500 +0.94%, MTD +2.87%, YTD +26.69% c) Russell 2000 -0.10%, MTD +2.26%, YTD +19.84%

Drivers: I) White House Economic Advisor, Larry Kudlow reportedly said that current negotiations between the U.S. and China are ‘very constructive’ and negotiators are getting closer to an agreement. Kuldow further stated that President Trump “likes what he sees, he’s not ready to make a commitment, he hasn’t signed off on a commitment for phase one, we have no agreement just yet for phase one.”

II) Retail Sales rose 0.3% in October, and ex-auto sales came in a bit lower at a 0.2% gain. On the plus side, sales were led by motor vehicles where despite weakness in unit auto sales posted earlier in the month, rose 0.5% in October. Sales at gasoline stations, which are typically skewed by monthly price swings, jumped 1.1%. When excluding both autos and gas, retail sales managed only a 0.1% rise to fall below the Street’s consensus range.

III) October’s CPI came in at a higher-than-expected 0.4%, but a more modest 0.2% October gain was seen in core inflation. This modest inflation rate offers some justification for the Fed’s simulative monetary policy. Year-on-year, consumer prices were up 1.8% from October last year for a 0.1% gain and moving in the Fed’s intended direction. Core prices, which exclude energy and food, moved in the other direction, down 0.1% to 2.3%.

IV) The U.S. Producer Price Index rose 0.4% in October with the year-on-year rate rising at 1.1%. These are still highly modest readings exemplified by the ex-energy ex-food core which rose 0.3% on the month for yearly inflation at an as expected 1.6% and down from September’s 2.0%. Adding a little pressure in the month were trade services, which track costs at retailers and wholesalers, and which jumped 0.8% in the month.

V) Equities in November are higher with Large-Cap, Value, Industrials and Technology leading equity price performance. The laggards for the month are Small-Cap, Growth, Utilities and REITs.

Capitalization: Large Caps +2.92% (YTD +26.68%), Mid-Caps +2.66% (YTD +26.48%) and Small Caps +2.26% (YTD +19.84). Style: Value +2.56% (YTD +21.60%) and Growth +1.95% (YTD +19.98%). Industry Groups: Technology +4.35% (YTD +42.18%), Information Technology +4.33% (YTD 42.03%), Industrials +4.86% (YTD +29.71%), REITs -1.90% (YTD +26.94%), Financials +3.76% (YTD +26.91%), Communication Services +2.57% (YTD +24.28%), Consumer Discretionary +0.45% (YTD +23.89%), Consumer Staples +0.33% (YTD +23.12%), Utilities -2.11% (YTD +21.56%), Materials +3.77% (YTD +21.28%), Healthcare +2.94% (YTD +14.17) and Energy +3.83% (YTD +7.62%).

EUROPEAN EQUITIES

The MSCI Europe index rose last week by +0.42% due to optimism over the U.S./China trade negotiations, following the release of positive comments from White House Economic Advisor, Larry Kudlow.

Drivers: I) Eurozone Industrial Production for September came in at a better than expected 0.1% rise. The monthly rise in output (ex-construction) was not enough to prevent the sector from sliding into recession as a 0.9% quarterly decline followed a 0.6% contraction in the second quarter. Annual growth in September was again negative although at minus 1.7%, at least this constituted an improvement on August’s minus 2.8%.

II) The second look at Eurozone economic growth last quarter showed no significant revisions to the preliminary flash report. Real GDP is still estimated to have expanded a muted 0.2% versus the second quarter while the annual rate was slightly higher to 1.2%. The Q3 update confirms that the Eurozone economy remains sluggish. Recession risks still seem limited, but without a stronger rate of expansion, the ECB’s task of meeting its inflation target will not get any easier.

III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.42% for the week (MTD +1.42%, YTD +19.03%).

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ASIAN EQUITIES

Asian equity markets were mixed as positive signs of progress in the US/China trade talks were offset by disappointing Chinese economic data. The Dow Jones Asia Index fell by -1.04% for the week, (MTD +1.68%, YTD +6.33%).

Drivers: I) China’s industrial production increased by 4.7% on the year in October, down sharply from 5.8% in September and well below the consensus forecast of 5.4%. Industrial production rose 0.17% on the month after increasing 0.71% previously. Growth in retail sales and fixed asset investment also fell short of the consensus forecast in October. The decline in headline growth in October was driven by weaker activity in manufacturing and mining.

II) China’s retail sales grew 7.2% on the year in October, down from 7.8% in September and weaker than the consensus forecast of 7.8%. Retail sales rose 0.46% on the month after increasing 0.68% previously. Weaker headline retail sales growth in October was broad-based, with weaker growth recorded for eight of the ten spending categories, including autos, furniture, oil and oil products, building and decoration materials, and home appliances.

III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -0.38% (MTD +1.65%, YTD +18.71%), the Hang Seng Index declined by -4.83% (MTD -2.04%, YTD +1.90%) and the Shanghai Composite dropped by -2.46% (MTD -1.29%, YTD +15.94%).

FIXED INCOME

Treasury yields experienced their sharpest drop in a month and half as news reports suggested U.S. Trade officials were intimating, they were closer to a Phase One deal.

Performance: I) The 10-year Treasury yield was lower last week ending at 1.833% down from 1.942%. The 30-year yield declined last week finishing at 2.310 dropping from 2.430%.

II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.54% last week, MTD -0.49% and YTD +8.31%. The Bloomberg Barclays US MBS TR was higher by +0.26% last week, MTD -0.01% and YTD +5.97%. The Bloomberg Barclay’s US Corporate HY Index was lower by -0.05%, MTD +0.13% and YTD +11.86%.

COMMODITIES

The DJ Commodity Index was weak last week dropping by -0.83% but is positive month to date +0.63% (YTD +7.35%). Commodity prices were lower last week as industrial metals and agriculture traded both up and down, as news regarding the US/China trade negotiations had both positive and negative aspects.

Performance: I) The price of oil rose last week by +0.85% up to $57.93 and has risen month to date in October by +6.92% (YTD +27.57%). Oil prices turned higher last week as optimism over the U.S./China trade deal improved prospects for energy demand.

II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was lower by -0.41 ending at 98.00 for the week (MTD +0.67%, YTD +1.90%). The USD declined last week as U.S interest rates fell, and on the perception that positive steps were being taken in the U.S./China trade negotiations.

III) Gold rose last week, as investor demand for the precious metal has been strong from the central banks and retail investors. Gold was higher by +0.58% last week, rising to $1468.7 (MTD -3.04%, YTD +14.65%).

HEDGE FUNDS

Hedge fund returns in November are mostly higher for the month with core strategies, Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy all in positive territory.

Performance:

I) The HFRX Global Hedge Fund Index is higher at +0.30% MTD and up +6.55% YTD.
II) Equity Hedge has risen by +0.32% MTD and is up +8.77% YTD.
III) Event Driven is higher MTD +0.62% and is higher YTD +6.24%.
IV) Macro/CTA has risen by +0.14% MTD and is up +3.73% YTD.
V) Relative Value Arbitrage has advanced by +0.07% and is up +5.25% YTD.
VI) Multi-Strategy is up MTD at +0.03% and is higher by +4.92% YTD.

ECONOMIC DATA WATCH AND MARKET OUTLOOK

The Dow Jones Industrial Average, S&P 500 and NASDAQ all reached new all-time highs last week, as investors pushed equities higher on seemingly positive progress being made in the U.S./China trade talks. White House Economic Adviser Larry Kudlow stated a deal was close, but “not done yet”. Commerce Secretary Wilbur Ross chimed in as well, saying Phase 1 of the 3 anticipated phases was progressing and the success of this trade centric agreement hinged on China’s willingness to commit to $40 to $50 billion of agricultural purchases. Fed Chair Jerome Powell in his testimony before the U.S. House of Representatives last week did his part to keep equities on an uptrend. Chairman Powell reported that U.S. growth was steady, inflation was low and below target, and any changes to interest rates would be data dependent. The Fed Fund futures are not predicating any rate change for the rest of 2019, and in 2020, the highest probability for a rate cut is seen for next November at only 37.2%.

As we enter next week’s trading sessions, the holiday season is upon us and equity markets historically have posted their best monthly gains in November and December. With accommodative monetary policy from the global central banks, ok earnings and strong equity market technicals (69% of major global equity markets are trading above their 200-day moving average according to Ned Davis Research), global equities should trend higher. In the U.S., since 1950, the S&P 500 has averaged a 1.49% and 1.57% monthly return for November and December respectively. This would be a welcome holiday present after a disappointing 2019 December equity market performance that saw the DJIA drop 12.0% and the S&P 500 by 11.00%.

In turning to next week’s economic calendar, the economic data releases of most interest will be related to U.S. housing and consumer sentiment. We kick off Monday with Housing Market Index which has been supported by a boost in currents sales and a rise in traffic. After rising to a much better than expected 71 in October, the Index is projected to hold at this solid level in November.

On Tuesday U.S. Housing starts will be released, noting that monthly starts and permit data have been volatile, but have been accelerating higher in a positive trend. Starts in October are expected to come in at a 1.320 million annual rate, sharply higher than September’s 1.256 million. The consensus for permits is pointing to a slight decline, at 1.380 million versus 1.391 million in August (revised from an initial 1.386 million).

Existing Homes sales out on Thursday, declined in September to 5.380 million thought the three-month average posted a strong gain. The year on year rate was also solid rising by 3.9% which was a 2 1⁄2 year high. A sharp improvement is expected for October with the consensus at 5.485 million and a 2.1% monthly gain.

Closing the week is the important read on how shoppers feel going into the all-important holiday season, with the release of the Consumer Sentiment Index. The Street consumer is a solid 95.7 for the final November report. Inflation expectations have been steady and low, at 2.5% for the year-ahead outlook in October where they are expected to hold in November.

Data Source: Haver Economics