Top Weekly Themes
- The U.S housing market ended 2019 on a positive note as homebuyers took advantage of lower borrowing costs. Existing home sales, which make up roughly 90% of the housing sector, increased roughly 4.0% in December at an annual rate of 5.54 million units, the highest amount in nearly two years. Higher sales are a positive, but at the expense of lower housing supply – a negative for home buyer affordability. Housing supply dropped to a record low in December, putting upward pressure on home prices. Overall, we expect a healthy housing market this year driven by low mortgage rates and a financially healthy consumer. Also worth noting, home purchases normally coincide with other types of consumer spending related to furnishing and home improvements – a positive for economic growth.
- The new coronavirus from central China caught the market’s attention last week as investors gauged the risk of the deadly virus spreading and impacting global economic growth. The World Health Organization voiced their concerns for the virus, but stopped short of declaring the situation a global health crisis. Instead, ongoing monitoring will be extremely important. Fears of weakening global growth contributed to U.S. Treasury security prices rising (interest rates falling), while oil prices were down over 5.0% as investors assume travel restriction could limit demand for fuel. Within U.S. equities, the NASDAQ hit a new high record high last week before dropping after more cases of coronavirus in the U.S. were reported Friday afternoon.
- The Eurozone manufacturing data came in better than expected at 47.8, the highest reading since April 2019. Although the sector remains in contraction territory, the bounce from its September low is a positive sign the European Central Bank’s aggressive monetary policy actions are working to stabilize economic growth. The easing of trade tensions between the U.S. and China will potentially add further support as the year progresses – assuming ongoing trade discussions remain constructive. In the U.S., the manufacturing sector remains in expansionary territory based on the Markit US Manufacturing PMI but dropped from the prior month. A global recovery in manufacturing would be indicative of stabilizing economic growth. Should this improvement materialize, the impact on financial market could be far reaching – slightly higher interest rates, a steeper yield curve, and better performance for cyclical and value-oriented stocks.
|S&P 500||0.3%||3.0%||28.6%||15.9 %||12.4%||1.83%|
|Russell 1000 Value||(0.1%)||1.0%||21.0%||10.0%||8.7%||2.27%|
|Russell 1000 Growth||0.6%||5.1%||35.9%||21.4%||15.6 %||0.97%|
|Bloomberg/Barc US Aggregate||0.4%||1.0%||9.6%||4.3%||3.0%||2.18%|
|Bloomberg/Barc US High Yield||(0.2%)||0.5%||10.8%||6.2%||6.2%||5.17%|
|Bloomberg/Barc Muni Bond||0.3%||1.3%||8.6%||5.0%||3.5%||1.55%|
|Bloomberg/Barc Global Agg. Ex U.S.||0.3%||(0.1%)||5.2%||3.9%||2.2%||0.88%|
|Crude Oil (WTI)||(5.0%)||(9.0%)||5.6%||1.8%||4.0%||55.6|
As of January 23, 2020 (close)
US Treasury Total Public Debt Outstanding (3-31-2005 – 1-24-2020)
- The U.S. Treasury Department recently announced they would begin selling 20-year U.S. government bonds, a maturity that the department last sold over 30 years ago. The additional maturity within the Treasury’s arsenal will hopefully attract more capital to help support U.S. debt levels that continue rising.
- The U.S. deficit approached $1 trillion in fiscal 2019, a threshold last crossed back in 2012 when the U.S. government ran four consecutive years of $1 trillion-plus dollar deficits to support the U.S. economy during the aftermath of the financial crisis.
- Accumulated U.S. deficits has led to outstanding federal debt held by the public relative to U.S. GDP to nearly 80%, a level that is expected to continue rising given projections by the Congressional Budget Office.
- Fears that more government debt will lead to higher borrowing costs have yet to materialize as U.S. Treasury yields remain near historically low levels.
- Currently, we don’t have any immediate concerns given the amount of outstanding U.S. government debt although we believe the ongoing trend may become problematic if borrowing costs revert back to pre-crisis levels.
The U.S. Federal Reserve (Fed) began expanding its balance sheet again in the fourth quarter of last year to provide additional liquidity into the funding markets. The balance sheet has since grown roughly $400 billion, to $4.15 trillion. The liquidity injection was very supportive in bringing short-term borrowing costs, especially within the repo market, back to reasonable levels and alleviating concerns that bank reserve levels were inadequate to support the lending markets. Although not necessarily the Fed’s intentions, a portion of the additional liquidity, to some extent, probably found its way into the financial markets as well. The additional liquidity coincided with a steady rise in the equity markets, most notably the S&P 500 that returned roughly 9.0% in the fourth quarter.
S&P 500 Index and the Federal Reserve Balance Sheet
(9/30/19 – 12/31/19)
Source: Bloomberg Finance, LP
The Fed’s liquidity injections combined with the 75 basis points of rate cuts in the back half of last year provide a supportive environment for economic growth this year. Trade tensions and global growth concerns remain, however the Fed seems committed to doing what they can to keep this expansion going. Investors can certainly debate the long-term consequences of this, and other, central bank actions. Is it sustainable? How will this “experiment” end? The truth is no one knows as the monetary policy environment that has persisted for the past 10 years is unprecedented. We think in the absence of an economic recession and/or meaningfully higher inflation, current policy will support financial asset prices.