Stocks moved to fresh all-time highs last week, supported by positive earnings and signs of stabilization in the ongoing coronavirus outbreak.
First-quarter economic growth is being impacted by the virus outbreak, especially in China, but we expect this shock to be transitory. While the ultimate impact in China and pass-through to the U.S. remains uncertain, we are encouraged that the infection rate is slowing. Meanwhile, China is applying significant economic stimulus which should allow for a snap-back in economic activity once the virus peaks.
|MSCI Emerging Markets||1.4||-0.7||9.6|
|10-year U.S. Treasury||1.58||1.92||2.68|
|30-year U.S. Treasury||2.04||2.39||3.01|
Source: Janney ISG, Bloomberg. Data as of 2/14/19.
We are encouraged by the still healthy U.S. economic indicators (discussed below) and the improvement in the global leading indicators that had been taking hold prior to the virus outbreak. Fourth-quarter earnings results came in better than expected
and inflation remains low—giving central bankers flexibility with low interest rates. We expect all of this to continue supporting stocks.
U.S. Economic Developments and Analysis
The economic releases last week showed elevated business and consumer optimism, healthy consumer spending, and subdued inflationary pressures. This is all consistent with steady economic growth.
The NFIB Small Business Optimism Index rose in January, up in three of the past four months. While off its all-time high reached in August 2018, the index is still elevated and has been range-bound near its current level over the past year, which is consistent with continued economic expansion.
On a y/y trend basis, retail sales were up 4.4%, the most since October 2018. Discretionary retail sales were up 4.7% y/y, indicating that despite some weakness in the month-to-month data, consumer goods spending growth is still robust. Moreover, the outlook remains positive, supported by rising consumer sentiment. The University of Michigan Consumer Sentiment Index increased to its highest level in nearly two years, and close to the highest it’s been since early 2004.
The OECD U.S. Composite Leading Indicator (CLI) shot up to an eight-month high in December, indicating some strengthening in economic activity at year-end. This was the fourth straight increase in the CLI and by the most since January 2012. Initial claims for unemployment insurance rose to 205,000, while the four-week average of claims was unchanged at 212,000, near its lowest level since 1969—indicating a still healthy labor market.
The Consumer Price Index edged up modestly to a 2.5% year-over-year increase, driven by higher shelter prices which were up 3.3% y/y. Weak commodity prices continue to put downward pressure on inflation. This CPI report shows that consumer price inflation remains subdued, supporting a continued low interest rate policy stance from the Federal Reserve.
Leading Indicators Consistent With Stable Global Economic Growth
While the data was collected before the major effects of the coronavirus outbreak, the composite leading indicators (CLIs) designed to anticipate turning points in economic activity relative to trend six to nine months ahead, pointed to stable growth
in the OECD area as a whole. Stable growth remained the assessment for Japan, Canada and the euro area as a whole, including France, Italy, and now Germany. In the United States and the United Kingdom, the CLIs are tentatively pointing to growth gaining
momentum from below-trend.
Prior to the coronavirus outbreak, tentative signs of growth gaining momentum were also emerging in China, but there is a high degree of uncertainty about near-term developments. Among other major emerging economies, growth gained momentum in Brazil, remained stable in Russia, and decreased in India.
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.