Stocks continue to reach new record highs with the S&P 500 Index on track to end the year up over 30%.
Stocks are reacting favorably to several factors. Trade tensions have eased with the U.S. and China both indicating they will sign a phase-one trade deal in early January. The imminent Senate passage of USMCA (NAFTA 2.0) is also reducing business uncertainty.
|MSCI Emerging Markets||1.0||19.1||20.7|
|10-year U.S. Treasury||1.88||2.72||2.41|
|30-year U.S. Treasury||2.32||3.02||2.74|
Source: Janney ISG, Bloomberg. Data as of 12/27/19.
The Federal Reserve cut interest rates three times in 2019 and is providing significant support to money markets which has been a source of market concern. The Fed has flexibility with its low interest rate policy as we enter 2020 due to muted inflationary
pressures. The economy continues to perform well, supported by the accommodative Fed policy. Easier Fed monetary policy helped reduce recession fears which was a major market concern after the Fed raised interest rates in December 2018.
We envision another year of positive economic growth and favorable markets in 2020. The U.S. economy should remain well supported by a healthy consumer, low interest rates, and improving business optimism with reduced trade uncertainty. We see the global backdrop improving with reduced trade uncertainty and significant Chinese economic stimulus that’s leading to improving global manufacturing indicators. Our optimism for 2020 is tempered by potential volatility caused by the upcoming presidential election and the possibility for trade tensions to flare anew.
A Light Week of Positive Data for U.S. Economy
While the holiday-shortened week produced few economic reports, they remain consistent with a healthy consumer that is producing steady economic growth.
The Philly Fed State Coincident Indexes increased in 39 states in November, decreased in nine, and were unchanged in two. These state indexes remain consistent with further economic growth and low recession probability.
Initial jobless claims fell 13,000 last week to 222,000 while the four-week average of claims, which smooths volatility, increasing to 228,000, the highest since February. However, claims around this time of year can be volatile due to seasonal hiring, and the current level remains very low by historical standards.
The Bloomberg Consumer Comfort Index rose to its highest level in more than two months. The 52-week average increased to its best level since May 2001. High consumer confidence readings, along with historically low jobless claims, continue to suggest a healthy consumer will support further economic growth.
Meanwhile, evidence of a healthy consumer continues to show up in housing data. New home sales increased 1.3% in November to a 719,000 unit annual rate. The three-month average sales rate picked up to its highest level since September 2007, as the housing market continued to benefit from low mortgage rates and solid household sector fundamentals (low unemployment and faster wage growth). On a y/y basis, new home sales were up 16.9%, with three of the four regions posting gains, as demand has strengthened while pent-up demand remains.
The durable goods report continues to show weak manufacturing activity. Durable goods orders declined 2.0% in November, the most in six months, with weakness in transportation orders, led by defense aircraft. Excluding transportation, orders were flat. However, we anticipate that manufacturing conditions will improve in 2020 on reduced trade tensions, pent-up demand, and favorably low interest rates.
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