Bryn Mawr Trust Monday Market Insights – January 13, 2020

Top Weekly Themes

  1. December employment report a bit weaker than expected, but a silver lining for stocks: nonfarm payrolls indicated an addition of 145,000 workers versus expectations for 160,000. In our view, the labor market remains on solid footing as this report comes on the heels of the October and November numbers that significantly exceeded expectations. Perhaps even more critical for stocks, average hourly earnings dipped below forecast at 2.9% year-over-year growth versus expectations for 3.1% growth.  Evidence that wages are still growing, but the pace of growth is not rapidly accelerating, means elevated corporate profits may come under less pressure than many investors expect.  Muted wage growth also underscores an inflation backdrop that remains benign, unlikely to provoke any tightening by the Federal Reserve.
  2. Investors brush off conflict with Iran: the political ramifications and loss of life should never be minimized, but investors will be well served not to overreact to geopolitical disruptions. Although each situation is nuanced in its own way, financial markets have behaved in a similar pattern throughout history – an initial move lower as investors take stock of the situation, then a resumption of the previous market trend. For perspective, during WWII, the Korean War, Vietnam, and the Gulf War the S&P 500 returned an average of 11.4% per year.[1]
  3. Worst to First? Energy Stocks in Focus: we think the jury is still out on whether energy stocks can be a market leader, but we are intently watching early evidence of improvement. For the first time in 15-months the equally weighted energy stock index is trading above its 200-day moving average.  We also note that the number of energy stocks making new short-term highs is accelerating.  Energy exchange traded funds saw significant outflows in 2019 (over $4 billion), so investors remain underinvested in the sector.  Oil prices started rising in October 2019, so we do not believe higher commodity prices hinge on an escalation of Middle East tensions.

Returns Table

EquitiesWeekYTD1-Year3-Year5-YearDiv Yield
S&P 5000.9%1.4%26.7%44.3%60.1%1.83%
Russell 1000 Value0.4%0.1%19.7%21.7%32.2%2.27%
Russell 1000 Growth1.4%2.7%33.4%68.6%90.0%0.97%
Russell 20000.1%-0.2%15.7%22.7%40.4%1.27%
MSCI EAFE1.1%1.1%15.9%14.2%23.3%3.19%
MSCI Emerging1.2%1.4%14.1%28.4%28.2%2.14%
Fixed IncomeWeekYTD1-Year3-Year5-YearYield
Bloomberg/Barc US Aggregate-0.2%0.2%5.7%2.7%-0.9-%2.69%
Bloomberg/Barc US High Yield0.1%0.4%6.4%0.7%2.2%4.97%
Bloomberg/Barc Muni Bond0.1%0.6%4.9%4.8%2.6%2.42%
Bloomberg/Barc Global Agg. Ex U.S.-0.9%-0.7%3.1%0.5%-1.1%2.78%
CommoditiesWeekYTD1-Year3-Year5-YearLevel
Crude Oil (WTI)-0.1%-3.5%10.7%5.5%-30.4%5,912.0
Natural Gas2.7%0.9%-32.2%-44.9%-69.3%2.2
Gold-0.4%2.1%20.4%31.1%27.6%1,557.5
Copper1.0%3.2%10.9%0.1%6.157.0
CurrenciesWeekYTD1-Year3-Year5-YearLevel
Euro/USD1.121.121.151.061.181.11
USD/YEN108.30108.66108.19115.42118.85109.50
Pound/USD1.321.271.271.211.511.30

As of January 10, 2020


Citi Economic Surprise Index - Eurozone
Sources: FactSet, Inc.; Bryn Mawr Trust

Key Takeaways

  • The Citi Economic Surprise Index measures whether economic data releases are being reported above or below forecasts. Readings below zero indicate data below expectations, while readings above zero indicated better than anticipated results.
  • For virtually all of 2019, economic data in Europe fell short of expectations. Recently, we have seen a pronounced shift, with early signs that the environment abroad is improving.
  • Europe was the epicenter of the global economic slowdown in 2019, as manufacturing was meaningfully impacted by trade tensions.
  • Even with manufacturing data in the U.S. still soft, we think a recovery both here and abroad will continue to materialize in the coming months.
  • If correct, we should see cyclical areas of the market perform well – value and international stocks, as well as sectors like industrials and financials.

Commentary

Objective data points are so important, particularly today when it is easy to become distracted by headlines.  Especially as it relates to recessions, consistent insight can be an important component of any market view. Below, we present an analysis that we use as part of our process.  The conclusion is that the economic expansion looks poised to continue in 2020.

Measure of Change in Unemployment Rate


Sources: FactSet, Inc.; Bryn Mawr Trust

Explanation

If the current unemployment rate (in the form of its three-month average) is at least 0.50% above its minimum from the previous 12 months, then the economy is already in a recession.[1]  The indicator has reliably signaled a recession within 4–5 months of its inception and has never called a recession incorrectly since 1970.[2]  Although not predictive, in real time one will not know if a recession has started until well after the fact.  For example, NBER announced the Great Recession in December 2008, a full year after the recession had already started.  Given its reliability, we use this tool as a confirming data point with other more forward-looking measures.  It may also help pinpoint the end of a recession.


[1] Brookings Institute
[2] Ibid.

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