The global news cycle has not wasted any time as we ring in the new year and the new decade.  The focus has been squarely on Iran after a US drone strike killed Iranian military general Qasem Suleimani.  The market initially reacted negatively, but has since rebounded as geopolitical tensions outside of major economies tend to cause short-term volatility but ultimately result in relatively little long-term impact.  Under the Iran headlines, we are likely to get both a USMCA (NAFTA replacement) and a Phase 1 trade deal with China before the end of the month, both of which should be supportive to global markets.  The impeachment trial of President Trump should begin in the Senate in the coming weeks, and oh yea, it is an election year.  Buckle up, 2020 is here!

Market Technicals

SPY SPDR S&P 500 ETF daily Stock Chart

This Month Comments

The pullback has not yet materialized, and markets were calm through the holiday season.  Despite the Iran news, the volatility has been fairly muted, even here around the all-time-highs.  We are still extended and overbought here, so that correction in the next few weeks would not be at all surprising.

Prior Month Comments

After an upward drift for most of November, the market sits in a bit of an extended position and we can expect a pullback of perhaps 50% of the recent run up, which would put us right around the support area of 302.  I wouldn’t be surprised if that is tested here in the next few weeks.

Chart source


Source: Federal Reserve Bank of Atlanta

Real GDP was un-revised to a 2.1% annual growth rate in Q3, matching consensus expectations.  Today’s final GDP report for the third quarter showed the same moderate 2.1% annualized pace of growth that was estimated last month, but with a small decline now in corporate profits compared to the small increase in prior readings. The mix of revisions from the previous estimate were more positive. Consumer spending on services and commercial construction were revised slightly higher, while inventories were revised lower, which leaves more room for inventory growth in future quarters. “Core” real GDP, which strips out inventories, net exports, and government purchases, rose at a 2.3% annual rate in the third quarter and is up at a 3.0% annualized rate in the past two years.

The ISM Manufacturing Index declined to 47.2 in December, lagging the consensus expected 49.0.   Manufacturing activity continued to slow as 2019 came to a close, according to the Institute for Supply Management (ISM) survey, hitting the lowest level since 2009. However, the ISM index is calculated through a survey of purchasing managers who are often swayed more by sentiment than actual activity, so we think it should be taken with a grain of salt. The index has dipped below 50 earlier in this recovery – without signaling recession – on three occasions in 2012, once again in 2013, and for five consecutive months in 2015/16. Each time, the economy kept growing. The two most forward-looking indices – new orders and production – both declined in December and remain below 50, signaling a slowdown in activity. The new orders index fell to 46.8 from 47.2 in November, while the production index dropped to 43.2 from 49.1. Despite the continued weakness, we expect a return to growth in the months ahead. Why? The ISM data doesn’t match what we are seeing from other reports. The latest report on personal consumption shows goods consumption through November up at a 6.6% annualized rate, on-track to show the largest annual increase for the series in fifteen years! So, if consumers are clearly buying, and companies are apparently – according to today’s report – not producing, something has got to give.

Existing home sales declined 1.7% in November to a 5.350 million annual rate, lagging the consensus expected 5.440 million.  Sales are up 2.7% versus a year ago.  The median price of an existing home rose to $271,300 in November (not seasonally adjusted) but is up 5.4% versus a year ago.  Average prices are up 4.0% versus last year.

Housing starts increased 3.2% in November to a 1.365 million annual rate, beating the consensus expected 1.345 million.  Starts are up 13.6% versus a year ago.  Following a similarly healthy report in October, housing starts continued to surpass expectations in November. The key driver of the 2019 recovery in home building continues to be single-family starts, which have been on a general upward trend since bottoming in February and are within spitting distance of new highs. Meanwhile, the three-month average of single-family starts hit a post-recession high in November. Conversely, multi-family starts have been range bound since 2015 when an upward trend ended. On average, each single-family home contributes to GDP about twice the amount of a multi-family unit, so a growing share of single-family construction will be a boon for economic growth.

Retail sales rose 0.2% in November (+0.3% including revisions to prior months) versus the consensus expected gain of 0.5%.  An OK report out of the retail sector today; not strong, not weak. Retail sales rose 0.2% in November, falling a little short of the consensus expected 0.5%. However, part of the consensus miss may be due to a late Thanksgiving, which pushed Cyber Monday to December 1. Still, overall sales are up a respectable 3.3% from a year ago and the year-ago comparison should move up substantially for December. In November, sales rose in eight of the thirteen major retail categories. Non-store retailers (think internet & mail order) and autos led the way rising 0.8% and 0.5%, respectively. Non-store sales are up 11.5% from a year ago, sit at record highs, and now make up 12.9% of overall retail sales, also a record. The largest decline in sales in November was for health and personal care stores, which dropped 1.1%. “Core” sales, which exclude autos, building materials, and gas stations (the most volatile sectors) grew 0.1% in November, are up 3.5% from a year ago, and up 7.0% annualized since the start of 2019, the fastest eleven-month pace of growth since 2006.

Source: First Trust Economic Briefings

Yield Curve Watch

The yield curve remained largely stable during December.

Valuation Snapshot

This month

Last Month

Top Tweets & Charts

With the exception of a few dips in there, it has been a pretty amazing 11 year run for the domestic equity markets.  Up 378% from the bottom.  At some point it will have to correct, but the consensus view is that it will not be in 2020.

The tech sector contributed 1/3 of the entire gain for the S&P 500 in 2019.  Apple and Microsoft accounted for 15% of it alone. 

But the biggest story of the decade was central banks.. and there is no sign that they are seeking to reduce their influence