For the week ending November 29, 2019
This publication is provided by BMT Wealth Management.
Stocks Push Higher as Economic Data Firms; Has Santa Come Early for Equity Investors?
Last week, U.S. economic growth was revised modestly higher in the third quarter from an annualized rate of 1.9% to 2.1%. The upward revision was driven partly by healthy consumer spending as well as business inventory accumulation. Interestingly, trade uncertainty has yet to notably impact consumer spending behavior as wages modestly rise and companies continue to add to their payrolls.
Positive U.S. economic data coinciding with more reported progress on phase I trade negotiations contributed to mid-week record highs on the S&P 500, NASDAQ, and DJIA during the shortened holiday week.
This week, the economic calendar is filled with important updates on the U.S. labor market, the U.S. manufacturing sector as well as the U.S. non-manufacturing sector for November 2019. With the Federal Reserve (Fed) scheduled to meet in mid-December, November 2019 U.S. economic data will be scrutinized for any indication that favorable underlying fundamentals of the U.S. economy are fading.
What can stock investors expect from Santa? With the S&P 500 up +25.3% through November, investors wonder how much gas might be left in the tank this year. Although past performance is certainly no guarantee of future results, history tells us December is typically a strong month for stocks, especially when the year-to-date return is already positive.
Since 1928, the median S&P 500 return in December is +1.47%, with a 73.6% chance of being up for the month. If the S&P 500 is down through November, those numbers deteriorate, with a median return in December of only 0.82% and a 67.5% chance of producing a positive month. When the S&P 500 is positive through November, as it was this year, the average December return increases to +1.70% and has been positive just over 77% of the time.
As mentioned, the market is always vulnerable to occasional downdrafts but, with history as our guide, investors can expect a positive final month of the year more often than not. Especially in a market with positive momentum, investors are behaviorally pulled into the market in an attempt to keep pace into the end of the year. Some assume that the typical “Santa Clause Rally” may have come early in 2019, and perhaps it has, but historical precedent is often our best compass in the absence of clear evidence to refute the typical pattern.
The U.S. consumer continues to lead economic growth. Consumer spending increased at an annual rate of roughly 3.0% in the third quarter and remained the bright spot of the U.S. economy. A strong labor market coinciding with healthy consumer balance sheets is contributing to high levels of consumer confidence and a strong foundation for consumers to spend. Interestingly, U.S. Household Debt-to-Disposable-Income continues to trend lower, approaching levels not seen since 2001.
U.S. Household Debt to Disposable Income
(12/31/2000 – 6/30/2019)
Source: Bloomberg, L.P.
For now, the ongoing trade tensions between the U.S. and China have yet to dampen consumer spirits, a positive for the largest contributing sector to the U.S. economy. However, we have been keeping a close eye on the business sector, looking for any indication that lackluster business spending and confidence levels, partly attributed to ongoing trade discussion and uncertainty, will weigh on consumer spending. One particular area of focus has been on the weekly initial jobless claims data.
Initial Jobless Claims dropped 15,000 last week – a positive indication that companies aren’t reducing their head count. Although job growth has slowed, the labor market is healthy as companies continue to add to their payrolls. Given the reduction in corporate spending/investment, there are concerns that corporations may begin shedding workers due to increased uncertainty related to trade and its impact on business confidence and the overall business economic outlook.
Initial Jobless Claims are reported on a weekly basis and track the number of individuals who are filing for unemployment benefits for the first time. The data is very timely and provides a quick snapshot into corporate layoffs. Initial claims are also highly correlated with recessions. Once initial unemployment claims turn steadily higher, a recession is almost always soon to follow. After consecutive weeks of increases, the initial weekly claims data dropped 15,000 to 213,000 last week. Although companies may be holding back on spending/investing in certain parts of their businesses, the employment data indicates that companies remain supportive of current staffing and existing payrolls.
US Initial Jobless Claims
(1/1/1970 – 11/22/2019)
Source: FactSet, Inc.
The Fed remains committed to 2.0% annual inflation. The Fed is currently conducting a thorough review of its monetary policies and tools to ensure that they are well equipped to respond to any prolong drop in inflation and/or inflation expectations. Last week, both Fed Chairman Jerome Powell and Fed Governor Lael Brainard spoke about the formal review and reiterated the importance of using monetary policy to promote economic growth and price stability.
Although the assessment is expected to continue into next year, we will be monitoring any potential changes to policy tools. The Fed’s fear of deflation opens the door to more aggressive monetary stimulus in order to prevent such a situation from occurring. Any changes to the Fed’s approach of managing price stability may certainly have implications for risk assets and the interest rate environment in general. For example, more accommodative monetary policy to generate a higher level of inflation may also contribute to higher asset prices.
This week, we will be pay close attention to soon-to-be-released economic data that will provide an update on the U.S. labor market and on the U.S. manufacturing and service sectors. Specifically, we will look to see if companies have maintained hiring in excess of population growth, as well as stability in both of the named sectors.
 Cornerstone Macro Research