Weekly Market Commentary – December 5, 2019

Weekly Highlights

Stocks climbed in a holiday-shortened week last week, for the 7th week out of the past 8, to post another fresh set of all-time highs. Small-cap stocks led markets higher, up 2.3%, followed by the tech-heavy Nasdaq up 1.7%, and the S&P 500 up 1.0%. Sector leadership was found in Consumer Discretionary +1.8%, Technology 1.7%, and Real Estate +1.4%, while Energy -1.5%, Utilities +0.1, and Financials +0.7 were laggards. Bond yields were down slightly for the week, and Commodities were sold down 2.0%.

Now that the calendar has turned to December, we’re reminded of what happened in December 2018, where investors were in the midst of the second-leg down of a nearly 20% correction that started in October. Recession fears came sharply into focus, as well as concerns about a protracted trade war with China. Fast forward to December of 2019 and not much has changed in our estimation, other than the S&P 500 is up over 26% from where it ended the year last year. Investors are still constantly barraged by on-again-off-again trade deal headlines, while the global economy has arguably gotten worse. As recently as Monday, the Institute of Supply Management Purchasing Managers Index (PMI) survey registered 48.1, down from the prior month, throwing water on the “global slowdown is over” narrative. Markets must now also contend with less-than-stellar developments on a China trade deal. According to President Trump which now may not happen until after the election, and according to the Chinese, not until existing tariffs are rolled back. Additional tariffs are still scheduled to go into effect on December 15, which the market assumed were off the table in the recent run-up. Who knows whether or not the new tariffs will be enacted, but there has been a lot of optimism built into stocks at all-time highs on a deal getting done soon with no more new tariffs put in place.

While we think it’s likely that trade will continue to be an overhang into 2020, we’ve written extensively about how we see growth continuing to slow, regardless of what happens with the China agreement. One new area of opportunity over the next few quarters may be an increase in inflation back toward the longer-term trend. The chart below shows the market’s measure of future inflation expectations via the 10-Year Breakeven Inflation Rate, which appears may have put in a bottom as of October, along with US private sector average hourly earnings growth, which continues to make new highs for the cycle. If our thesis plays out over the next 6 months or so, this may create an opportunity in areas like energy and commodities which historically outperform when inflation picks up. We also like the fact that these sectors of the market are out of favor and make up the smallest share of market cap of the S&P 500 since the beginning of our data set.