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Weekly Market Update, February 3, 2020

Weekly Market Update, February 3, 2020

Weekly Market Update, February 3, 2020

Posted on February 03, 2020 in by Nick Pantle

General Market News

 

  • Rates continued their downward trend last week, with the 10-year Treasury closing at 1.50 percent on Friday. It opened slightly higher at 1.53 percent on Monday. Three weeks ago, it was as high as 1.90 percent. The 30-year yield broke the 2 percent resistance level, hitting 1.99 percent, after being as high as 2.38 percent last month. The short end of the curve remains inverted, with the 2-year at 1.34 percent and the 3-year at 1.32 percent.
  • Global markets continued their sell-off, as concerns over the spread of the Wuhan Coronavirus continued to escalate. The World Health Organization declared the outbreak of the virus a public health emergency, and several airlines (including United, Delta, and American) canceled flights to China. The markets took a risk-off approach. WTI crude oil fell by 4.9 percent due to expectations for a short-term decline in oil demand with the numerous travel restrictions in place.
  • The worst-performing sectors on the week were energy, materials, and health care. Those among the top performers were utilities, consumer discretionary, and consumer staples. The discretionary sector stood out due to the strong performance of Amazon’s cloud division, as well as its growth in Prime subscribership.
  • We started off the week with Monday’s release of the December new home sales New home sales fell 0.4 percent, against expectations for a 1.5 percent increase. New home sales are a relatively small portion of overall sales, and the results can often be more volatile than existing home sales on a monthly basis. Despite the disappointing December result, new home sales continue to exhibit strong growth, with year-over-year sales up 23.7 percent when compared with December 2018.
  • On Tuesday, December’s durable goods orders report for December was released. Headline durable goods grew by 2.4 percent month-over-month, against expectations for 0.3 percent growth. This better-than-expected result was due to a rebound in volatile defensive aircraft orders—the major cause of November’s downwardly revised 3.1 percent decline in orders. Core durable goods orders, which strip out the impact of volatile transportation orders, declined by 0.1 percent during the month, which was below expectations for 0.3 percent growth. This marks the second straight month with declining core orders, as November’s core orders declined by 0.4 percent.
  • Tuesday also saw the release of the Conference Board Consumer Confidence Index for January. Consumer confidence increased by more than expected during the month, with the index rising from an upwardly revised 128.2 in December to 131.6 in January. Confidence now sits at a four-month high. Improving consumer confidence tends to support additional spending growth, so this was a very encouraging result to start the year.
  • On Thursday, the first estimate for fourth-quarter gross domestic product growth was released. The economy grew at an annualized rate of 2.1 percent during the quarter, against economist estimates for a 2 percent growth rate. This was in line with the 2.1 percent growth we saw in the third quarter. Net trade was the major driver of growth in the fourth quarter, as a sharp drop in imports and a modest increase in exports created a tailwind for domestic growth.
  • On Friday, December’s personal income and personal spending reports were released. Both income and spending increased during the month, with incomes rising by 0.2 percent while spending grew by 0.3 percent. This marks the 10th straight month with spending growth. Personal income and spending both grew at a similar pace throughout 2019, indicating that the spending growth that occurred during the year was sustainable. On a year-over-year basis, personal income rose by 4.5 percent in 2019, while spending grew by a solid 4 percent.
  • Finally, we finished the week with the second and final reading of the University of Michigan consumer sentiment survey. Consumer sentiment increased during the month, up from 99.1 midmonth to 99.8 at month-end. Economists had previously forecasted no changes for the index. This brings the index to an eight-month high, which is very impressive, given that the index hit a three-year low in August. This swift recovery, despite ongoing geopolitical uncertainty, is encouraging for the new year. With both of the major consumer surveys coming in better than expected during the month, the prospects for additional consumer spending growth in the first quarter are strong.

 

Equity Index Week-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500 –2.10% –0.04% –0.04% 21.56%
Nasdaq Composite –1.75% 2.03% 2.03% 27.35%
DJIA –2.52% –0.89% –0.89% 15.49%
MSCI EAFE –2.50% –2.09% –2.09% 12.16%
MSCI Emerging Markets –5.09% –4.66% –4.66% 3.78%
Russell 2000 –2.89% –3.21% –3.21% 9.02%

Source: Bloomberg

 

Fixed Income Index Month-to-Date Year-to-Date 12-Month
U.S. Broad Market 1.92% 1.92% 9.92%
U.S. Treasury 2.44% 2.44% 9.26%
U.S. Mortgages 0.70% 0.70% 6.60%
Municipal Bond 1.80% 1.80% 8.68%

Source: Morningstar Direct

 

What to Look Forward To 

We started the week with Monday’s release of the Institute for Supply Management (ISM) Manufacturing index. This measure of manufacturer confidence rose sharply from 47.2 in December to 50.9 in January, well above the expected increase to 48.4. This is a diffusion index, where values below 50 indicate contraction, so this encouraging result takes manufacturing back to expansion. Manufacturer confidence fell sharply in 2019, and this rebound may be a sign that the phase one trade deal between the U.S. and China is starting to bolster manufacturer confidence.

 

On Wednesday, December’s international trade report is set to be released. Economists expect the trade gap to widen, partially offsetting the November tightening that shrunk the deficit to a three-year low. The November result was due to a sharp drop in imports, caused by businesses preparing for new tariffs on Chinese goods to go into effect in December. According to advanced trade data, however, we’ll get a rebound in imported goods in December. Trade data will likely remain volatile as negotiations between the U.S. and China continue. There is some hope, however, that things will settle down slightly with the signing of the phase one trade deal between the two countries in January.

 

On Wednesday, the ISM Nonmanufacturing index is scheduled to be released. This index, which measures service sector confidence, should increase modestly from 55 in December to 55.1 in January. This is another diffusion index, where values above or below 50 indicate expansion or contraction, respectively. Accordingly, this result would be welcome, especially if manufacturing confidence also rises in January. The ISM Composite index (which combines manufacturer and service sector confidence) currently sits at a four-month high. Increased business confidence supports additional business investment, so further advances in this index would certainly be a positive development.

 

On Friday, January’s employment report is set for release. Economists anticipate that 160,000 new jobs will be added during the month, a step up from the 145,000 created in December. The underlying data is also expected to be solid. The unemployment rate should remain at 3.5 percent, while average hourly earnings growth is likely to increase by 0.3 percent. While the pace of new job creation slowed to start 2019, results in the fourth quarter largely beat expectations. Consumers cited the strong job market as a primary factor for increased confidence in January. Continued strength in employment would be another welcome signal that economic growth has picked up after moderating in 2019.

 

Presented by Masso Torrence

 

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

 

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