Highlights for the week:
Stocks surged higher last week setting a new round of all-time highs, as the US and China announced a phase-one trade deal and the Fed indicated it would remain on hold. Emerging market stocks rallied 2.9% for the week, followed by Developed International stocks up 1.1% and the S&P 500 up 0.8%. Yields ticked slightly higher, up to 1.82% on the U.S. Treasury 10 Year note. The U.S. dollar weakened causing commodities to post a 1.5% return on the week as well. Crude oil (WTI) is now up almost 20% from lows in October and up 37% year-to-date from the lows in January.
On Friday the U.S. and China announced that they had reached a phase-one agreement on trade, halting an 18-month escalation. The terms of the deal have not been fully disclosed, but what we do know is the following:
The deal appears to be relatively modest in scope but is valuable in the fact that it represents the first signs of de-escalation between the two nations since the saga began 18 months ago. We are not convinced that it will be enough to spur the return of business investment and CAPEX, but nonetheless it’s a step in the right direction. We anticipate trade spats to be with us at least until we get closer to the election, as a phase-two agreement with China may be more elusive and as Europe draws the ire of the President’s trade representatives.
While we have written about the divergence of economic data between the U.S. consumer and the industrial/manufacturing economy, it appears that the market is strong of the opinion that the slowdown is drawing to a close and that reacceleration is the de facto outcome going into 2020. The chart below from Morgan Stanley highlights the extent to which the S&P 500 has begun pricing in a positive rebound.
We are currently of the opinion that the market may be getting ahead of itself as we approach year-end. While we have seen a small degree of stabilization in global PMI’s over the past two months, all the hard data continues to deteriorate. It is too early to ascertain whether or not the global economy has bottomed and will reaccelerate from here, but at lofty valuation levels on the S&P 500, we believe risks in equity markets are to the downside going into the first quarter of 2020.
The week prior to the Christmas holiday here in the U.S. is relatively quiet on both the corporate and economic calendars. There are a handful of notable earnings releases including: Fedex (FDX), Micron (MU), Nike (NKE) and General Mills (GIS). On the economic data front, we will get Housing data here in the U.S. along with the second reading on third-quarter GDP. We will get an update on European PMI’s from Markit, and trade data from Japan and the EU.
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