Three in a Row
Domestic stocks rose sharply last week, for a third consecutive positive week. Stocks advanced every day but Friday as the strong start to 2019 continued. Small-caps outperformed, with the gains allowing the Russell 2000 to become the last major benchmark to escape bear market territory (a decline of at least 20 percent from recent highs). Within the S&P 500, industrials performed best, aided by strength in railroads and Boeing. Energy shares were also solid as oil prices rallied, although they gave back some of their gains on Friday. Financials lagged, and healthcare stocks also underperformed. Volatility continued to moderate, with the VIX hitting its lowest level in over a month, while higher-valued growth stocks outperformed slower-growing value shares.
Hopes that China and the U.S. might finally be making progress in resolving their trade dispute seemed to drive much of last week’s gains. Washington and Beijing wrapped up their first face-to-face trade negotiations since a temporary tariff truce was declared in December last week, claiming progress toward an agreement but leaving the most difficult issues for higher-level talks. Some seemed particularly encouraged by the surprise attendance of China’s vice premier, Liu He, at the mid-level talks. President Trump also lifted sentiment Tuesday morning after tweeting that talks were “going very well.” A consensus is growing that the recent market downturn has increased pressure on the White House to make a deal, while slowing growth in China is motivating their officials.
Last week’s gains came despite the partial federal government shutdown entering its third week, becoming the longest ever, with little hope of resolution in sight. Although the impact so far has been marginal, most economists agree that the shutdown will have an increasingly greater impact on the economy over time. Last week’s economic data were generally encouraging. Weekly jobless claims moderated, and a measure of small business optimism fell less than expected in December. The Institute for Supply Management’s gauge of service sector activity was a negative, echoing a sharper downturn in the Institute’s measure of manufacturing activity reported the previous week.
On Friday, the Labor Department reported that consumer prices had risen in line with forecasts, with the core CPI (ex-food and energy) increasing by 2.2 percent YOY. In an interview Thursday, Federal Reserve Chairman Jerome Powell pointed to low inflation as one factor that will allow the Fed to be “patient” in raising interest rates further. Those remarks appeared to help reverse a midday downturn in stocks following news that President Trump was canceling a trip to the Davos World Economic Forum because of the government shutdown.
The FOMC released its latest round of minutes last week, which were relatively dovish. It is most important to note that the Committee acknowledged the stock market rout; that the FOMC was preparing to pause on rate hikes; and that the FOMC wanted to emphasize that policy is data dependent; and that there aren’t many hikes left. Most analysts now think that the Fed likely to remain on hold re rate hikes until at least May or June. The yield on the benchmark 10-year U.S. Treasury note ended the week slightly higher (2.71 percent) as the safe-haven bid moderated a bit.
In overseas trading, the pan-European STOXX Europe 600 gained as optimism about U.S.-China trade talks outweighed signs of economic slowing in Germany and France and the announcement of layoffs in the region’s auto sector. China’s stock markets and currency advanced as momentum picked up, also on trade optimism. For the week, the Shanghai Composite added 1.5 percent and the large-cap CSI 300, China’s blue chip benchmark, rose 1.9 percent. In Japan, the Nikkei gained more than 4 percent.
Other news and notes follow:
- Economists see a growing risk of recession in the U.S. The big worries are trade tensions with China, rising interest rates, and market volatility.
- Investors were spooked about corporate profits in the fourth quarter of 2018. Now come the facts.
- Trend-following investment strategies — a computer-based way of trading that has become a major force in some markets — have gone from bullish to bearish to a degree not seen in a decade.
- American population growth now at an 80-year low. South Dakota and Utah are the most fertile states in the U.S., and the only two with birthrates high enough to sustain the current population. Low birthrates could disrupt the economy as the country’s population ages out of the workforce, though researchers say those effects could be offset by immigration.
- The eurozone’s unemployment rate fell to its lowest level in more than a decade during November. But even after more than five years of economic growth, big differences across the region remained, with (for example) joblessness at 3.3 percent in Germany and as high as 14.7 percent in Spain.
- So-called Modern Monetary Theory, a favorite among progressives, is going mainstream. MMT assumes we can print money forever with no hyperinflation, which is super-convenient for paying for more and bigger government programs. As explained in New York magazine: “So while a conventional economic thinker might say you establish a new government program and levy taxes (now or in the future) to pay for it, an MMT thinker would say you establish a new government program and the government prints the money to pay for it.” To this point, obviously, this idea is completely untested.
- Energy shares slumped 24 percent in the final three months of 2018, much worse than the S&P 500, when fears of a supply glut and worries about slowing demand in a weakening global economy pushed oil prices down nearly 40 percent. The stocks’ gain so far this month has outpaced the increase in the broad S&P. Utility stocks have been the worst performers so far in 2019.
- Fed chair Jerome Powell said the U.S. economy “is solid,”adding that he doesn’t predict a recession in 2019.
- Some venture capitalists are rooting for a market dip to calm Silicon Valley’s overheated start-up scene.
- BlackRock is laying off 500 employees around the world, or about 3 percent of its workforce, as the world’s largest asset manager grapples with “market uncertainty” and evolving “investor preferences.” State Street, another large investment management firm, is giving the axe to 15 percent of its senior management. There are others.
- U.S. retailers lost $34 billion in market value last week, led by Macy’s.
- The economy is still producing fewer new businesses every year than it did before the Great Financial Crisis.
- Ford and Jaguar both warned of job cuts last week, and both were at least partly tied to short-term problems: trade tensions, a China slowdown, Brexit, fuel-regulation changes, etc. However, there’s a lot more auto-industry upheaval to come, as car makers struggle to adapt to a growing shift toward electric cars. On the other hand, GM’s optimistic forecast for 2019 surprised many on Friday, triggering an 8 percent surge in GM stock.
- President Trump’s desire for a wall along the southern border to stop illegal immigrants is at the heart of the current governmental shutdown. Here are some of the numbers involved in the issue. In a televised prime-time address Tuesday, the president said a barrier along the southern border is necessary for national security, calling for lawmakers to fund it and end the partial government shutdown. Democratic congressional leaders responded, rejecting a wall as unnecessary and accusing Mr. Trump of stoking fear to gain support for his cause. An ominous clue that the government shutdown could be a long one – President Trump tweeted yesterday: “I am respectfully cancelling my very important trip to Davos.” He had been scheduled to leave January 21 — more than a week from now. This shutdown is now the longest on record; 800,000 federal workers didn’t receive paychecks Friday. A reporter asked President Trump, on the South Lawn of the White House, as he headed to Marine One for the border trip, “Does the buck stop with you over this shutdown?” The president replied, “The buck stops with everybody.” Still, the S&P 500 is up 7.4 percent thus far during the shutdown, on pace for its best shutdown performance ever. However, JPMorgan Chase lowered its forecast for first-quarter economic growth to 2 percent from 2.25 percent. “The primary reason for the downward revision is the economic impact of the ongoing shutdown of the federal government,” chief economist Michael Feroli said. Fed Chair Jerome Powell: “A longer shutdown is something we haven’t had. I do think that would show up in the data pretty clearly.” The shutdown is also distorting data or leaving policy makers all together in the dark. Commerce Department economic reports, for example, aren’t coming out. That meant no report Monday on national factory orders or Tuesday on the U.S. trade deficit. It could mean no report next week on retail sales and at the end of the month on fourth-quarter GDP.The Labor Department is funded, so its employment report will come out February 1, as scheduled. However, federal workers who are neither working nor getting paid count as unemployed, so the number could be ugly, threatening the streak of 99 straight months of job growth.
- We’re 386 days from the Iowa Caucuses. Who’s running?
- The U.S. military announced last week it had begun withdrawing troops from Syria, commencing a drawdown that has blindsided allies and sparked a scramble for control of the areas that American troops will leave. Despite being a NATO ally, Turkey will go ahead with its planned offensive against U.S. backed Kurdish militias in northeastern Syria.
- In pre-election years since 1950, the S&P 500 has delivered its best performance in January, posting an average climb of 3.9 percent for the month, according to the Stock Trader’s Almanac. Part of the reason: incumbents typically implement new policies, or push for lower taxes ahead of a presidential election to boost the U.S. economy.
- Mortgage rates fell last week, raising hopes for the housing market. The average rate for a 30-year fixed mortgage dropped to 4.51 percent, matching the lowest level in eight months, according to data from Freddie Mac.
- Amazon claims the market-cap crown for the first time. The retailer surpassed Microsoft as the world’s most valuable public company.
- New data analysis shows more than half of older U.S. workers are pushed out of longtime jobs before they choose to retire, suffering financial damage that is often irreversible.
- “T-Mobile, Sprint, and AT&T are selling access to their customers’ location data, and that data is ending up in the hands of bounty hunters and others not authorized to possess it, letting them track most phones in the country.”
- The “Green New Deal,” espoused by new Congresswoman Alexandria Ocasio-Cortez, among others, would cut the military in half, end the use of 88 percent of U.S. energy, and ban cars.
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