Welcome to The Roaring ’20s

Welcome to the roaring 20’s. Stocks ended the decade on New Years Eve in the green as the year’s optimism could not be put to rest.  Investors ignored weak economic numbers and yawned at the President’s trade announcement.

 

N O T E W O R T H Y

 

• Tie a string around your finger.  I know it was hard to focus on New Years Eve. What, with all the planned celebrations, some loud and large and others quiet and quaint.  Wherever you were at the turn of the decade, hopefully you spent it with those you love (I was).  WHILE YOU WERE THINKING ABOUT THE BALL DROPPING IN TIMES SQUARE, Consumer Confidence was released and showed a slight drop, missing economists expectations.  Uh oh… what would lead consumers’ confidence to fade slightly.  The stock market had its best year since 2013, unemployment is at its lowest in half a century, and interest rates remain low.  OK, to put things into perspective, the index came in at 126.5, down slightly from last month’s 126.8.  Digging deeper, confidence in the present situation is up slightly from 166.6 to 170.0 and confidence in the future is down from 100.3 to 97.4.  A solid holiday shopping season and the Phase One trade deal certainly contributed to confidence in the current situation.  A fade in future expectation may come from caution and not knowing what to expect in the year ahead.  These numbers tend to bounce around a bit so we look for trends.  The latest reading is slightly below the 2 year average of 129.14, which is not enough to ring the bell.  What should not be ignored is that the last 4 readings were all below the average, which some might consider a trend.  Let’s not forget to pay attention to what is important: the economy’s health is in the hands of the consumer.

• What to expect when you’re expecting… more great returns.  My regular readers know that I go out of my way not to attempt to predict or time the market.  I can write a book about my reasoning behind that strategy… and some day I just might.  For now I will only offer you some facts as we turn the page to a new year. At a high level, last year’s market gains were largely driven by the Federal Reserve’s dovish policy moves, improving trade relations with China, low interest rates, and the last remnants of the 2017 Tax Cuts and Jobs Act corporate tax cuts.  If you agree with me, we should ask whether we believe that those drivers will persist in the year ahead.  Off the bat, we can cross off the corporate tax cuts.  The Fed at current seems quite content with the economy and its policy.  The Dot Plot indicates that FOMC members are predicting that rates will remain the same throughout 2020.  If we look at Fed Funds futures, there is a 51.7% chance that rates will end 2020 in the same place and a 45.7% chance that rates will be lower.  If you do the math you would notice that there is a 2.6% chance that rates will be higher. Higher rates would only occur if inflation picked up significantly.  A jump in inflation would be the result of large wage gains resulting from the tight labor market… not entirely out of the question.  Now on to the trade war.  It seems highly likely at this point that a Phase One trade deal will be signed in the weeks ahead (Trump announced a date on New Years Eve).  Phase One is fully priced into the market at this point, so we are not likely to get much more mileage out of it.  The big contingencies with trade are what, if any, a Phase Two deal would include and whether China will meet its promises from Phase One.  Of course there are many other factors that impact market performance, but from where we stand today, the wind that drove much of last year’s gains is slightly less brisk.  We can also expect some volatility as it is an election year and the EU and China both are attempting to revive their stalled economies.  So the market will be going nowhere in a straight path… check in with me daily and we will travel the road together.  Welcome to the 20’s!

 

THE MARKETS

 

Stocks traded up mildly on Tuesday.  Consumer Confidence disappointed and the President set a date to sign Phase One.  The S&P500 climbed by +0.29%, the Dow Jones Industrial Average traded up by +0.27%, the Russell 2000 advanced by +0.26%, and the NASDAQ Composite Index ascended by +0.30%.  Bonds slipped and 10-year treasury yields climbed by +4 basis points to 1.91%.

 

NXT UP

 

– WHILE YOU SLEPT, China lowered loan reserve requirements making it easier for banks to lend money.  This is a monetary easing tool and the markets responded by rallying.

– Markit Manufacturing PMI is expected to be 52.5, same as last month.

 

daily chartbook 2020-01-02