Stocks reached record highs last week, reflecting healthy fundamentals and looking through the near-term impact of the coronavirus outbreak.
While first-quarter global economic growth is experiencing a significant disruption, especially in China, historical references suggest growth will rebound quickly once the virus is contained. We are encouraged by China’s aggressive response to the outbreak and the slowdown in the growth rate of new cases—despite not seeing a peak yet in the total number of cases.
|MSCI Emerging Markets||2.8||-2.0||7.8|
|10-year U.S. Treasury||1.58||1.92||2.68|
|30-year U.S. Treasury||2.05||2.39||3.01|
Source: Janney ISG, Bloomberg. Data as of 2/7/19.
Meanwhile, we are encouraged by the strength of the U.S. economy, which saw a stellar jobs report on Friday. January’s business surveys were also positive for the U.S. and global economy. Corporate profits are improving, inflation remains muted,
and central banks are accommodative. China is also increasing stimulus in response to the outbreak. All of this should continue supporting stocks.
U.S. Economic Developments and Analysis
The big news last week was from the January jobs report, which showed a growing labor force and tame wage inflation. January job growth jumped well above consensus at 225,000 with the unemployment rate little changed at 3.6%. Importantly, labor supply
continued its healthy expansion in January, with the prime-age labor force participation rising to a cycle high of 83.1%. Participation peaked at 84% in 1999, suggesting the current expansion can draw additional workers off the sideline. With the
labor force growing, there’s less upward pressure on wages. In January, average hourly earnings accelerated a touch to 3.1% y/y from 2.9%, but remain impressively tame given the 3.6% unemployment rate. All of this is important because a growing
labor force with muted wage inflation allows the Federal Reserve to keep interest rates low—thus enabling a longer economic expansion.
The business surveys also suggest further economic expansion. The ISM Manufacturing Index rebounded the most since July 2013, as factory activity expanded for the first time in six months. This increase was a welcome sign for a sector that has been rocked by trade tensions and slower global growth. While the ultimate impact from the coronavirus outbreak remains uncertain, sentiment among survey respondents about near-term growth was moderately positive for the first time in several months.
Meanwhile, the ISM Non-Manufacturing Index (NMI—a service sector survey) increased to a five-month high in January, indicating faster growth in services activity. Combined with the uptick in the ISM Manufacturing Index, this suggests that the U.S. economy gained some momentum at the start of 2020—with the readings consistent with 2.6% annual economic growth, based on historical data. Weekly jobless claims, which remain near the lowest level since 1969, and Philly Fed state leading indexes were also consistent with further economic growth and low risk of a near-term recession.
Global Manufacturing Survey Reaches Nine-Month High
The J.P.Morgan Global Manufacturing PMI (a timely business survey) showed further improvement at the start of 2020, with expansion of output and new orders accelerating (the forward-looking new orders-to-inventories ratio rose to a 10-month high). While
the coronavirus creates near-term uncertainty, this survey suggests that global manufacturing is well positioned for a recovery in 2020.
An Update on a Positive Earnings Season
About 77% of the S&P 500 stock indexes companies have now reported fourth-quarter results. Earnings are beating by 5.1%, with 62% of companies exceeding their bottom-line estimates—in line with recent trends. Earnings-per-share (EPS) is on pace
for +3.5%, assuming a typical beat rate for the remainder of the season. Financials, Technology, and Health Care are leading EPS growth. We expect higher earnings growth, driven by improving economic growth, to support stocks as we move through 2020.
This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. Past performance is not necessarily a guide to future performance.