Portfolio & Market Review: January 2019
World equities rallied back in January from a dismal 2018, up 8.0%, on positive signals from the US Federal Reserve (Fed) that it would be more patient with further rate hikes, as well as increased optimism that we may be getting closer to the end of the trade dispute between the world’s two largest economies. These signals were particularly welcomed in the emerging world as emerging market equities finished the month up 9%.
In the US, the market shrugged off the longest government shutdown in history as stocks returned 8.0%. The rebound from a dismal 4Q, where valuations approached levels not seen since late 2013, was best reflected in small cap stocks which finished the month up 11%. The outlook for the US economy remains firm. Earnings growth for 2019 is anticipated to remain positive, but slow to a more normal range of 8%-10%, while employment and wage data continue to point towards expansion, and inflation remains close to the Fed’s target.
Outside the US, concerns over a slowdown in China have not dissipated. China’s 4Q GDP dipped slightly and missed 6.5% for the first time. A slowdown in the domestic economy and added pressure from trade tensions have led the way for Chinese authorities to provide economic stimulus, which is expected to continue well into 2019 and should help support the domestic economy. In the eurozone, equities returned 6.3% despite economic data pointing to ongoing weakness. Italy slipped into recession and forward-looking indicators suggest that growth is stalling. The European Central Bank (ECB) indicated that the eurozone growth outlook has moved to the downside and therefore has maintained guidance that interest rates will remain unchanged.
Bond yields across the globe fell in January (i.e. prices rose) as investors looked to lock-in interest rates in the wake of the more cautious sentiment from the Fed and ECB. High yield bonds and emerging market debt had a strong month as the combination of a weaker Fed and prospects of a falling dollar increased the risk appetite for these investments.
The January rally was spurred on by two significant changes. First, the Fed’s announcement that they will be more patient with rate hikes, helped ease market fears about interest rates getting too high as growth looks to be slowing. Second, the talks between the US and China regarding trade appear to have softened a bit. Economic data is beginning to show that tariffs have had a significant effect on growth in China and Europe, and are affecting the US as well. While these developments have eased investor tensions, we are still in the later stages of the business cycle, where economic data is mixed and risks to growth remain. The outlook for the markets remains positive but expectations for higher returns should be tempered. It is possible that financial markets will be choppy in 2019, with attractive valuations and a growing economy counterbalanced by late cycle dynamics, trade concerns, and rising interest rates. Most industry experts were projecting global equities to return between 6% and 7% this year. As of January 31st, we have already exceeded the high-end estimate. Markets could well trade sideways for the upcoming quarters.
Monthly Economic News
• Employment: Total employment rose by 312,000 in December after adding 176,000 (revised) new jobs in November. Notable employment increases for the month occurred in health care (50,000), food services and drinking places (41,000), construction (38,000), manufacturing (32,000), and transportation and warehousing (25,000). The unemployment rate advanced from 3.7% in November to 3.9% in December. The number of unemployed persons increased by 276,000 to 6.3 million. A year earlier, the jobless rate was 4.1%, and the number of unemployed persons was 6.6 million. The labor participation rate rose 0.2% from November to 63.1% in December. The employment-population ratio remained at 60.6%. The average workweek increased 0.1 hour to 34.5 hours in December. Average hourly earnings increased by $0.11 to $27.48. Over the last 12 months, average hourly earnings have risen $0.84, or 3.2%.
• FOMC/interest rates: At its two-day meeting on January 29 and 30, the Federal Open Market Committee decided to leave rates unchanged, and, in an apparent reversal from opinions expressed last month, did not predict whether future hikes were in the future. "In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes." The next FOMC meeting is scheduled for March 19 and 20.
• GDP/budget: The advance estimate of the fourth-quarter gross domestic product, scheduled for release earlier this week, was delayed.
• Inflation/consumer spending: The Consumer Price Index fell 0.1% in December after being unchanged in November. Over the previous 12 months, the CPI rose 1.9%. Core prices, which exclude food and energy, climbed 0.2% for the month and were up 2.2% over the previous 12 months. According to the Producer Price Index, the prices companies received for goods and services dropped 0.2% in December following a 0.1% increase in November. Producer prices increased 2.5% over the 12 months ended in December. Prices less food, energy, and trade services were unchanged in December after rising 0.3% the prior month, and were up 2.8% over the previous 12 months. The Personal Income and Outlays report, scheduled for release earlier this week, was delayed.
• Housing: The housing sector has been slow to pick up speed primarily due to higher mortgage rates and scant inventory. Sales of existing homes plunged 6.4% in December from November. Year-over-year, existing home sales were down 10.3%. The December median price for existing homes was $253,600, down from $257,700 in November. However, existing home prices were up 2.9% from December 2017. Total housing inventory for existing homes for sale fell from 1.74 million in November to 1.55 million in December, rendering a 3.7-month supply at the then-current sales pace. By contrast, sales of new single-family homes jumped by 17% from October to November 2018, but were nearly 7.7% lower than in November 2017. The median sales price for new homes was $302,400, down from $325,100 in October and $41,000 lower than a year prior.
• Manufacturing: The manufacturing sector gained momentum in December. Industrial production edged up 0.3% following a 0.4% advance in November. For the fourth quarter, industrial production advanced at an annual rate of 3.8%. Manufacturing output increased 1.1% — its largest gain since February 2018. The index for mining increased 1.5%, but utilities dropped 6.3%, as warmer-than-usual temperatures lowered the demand for heating. The advance report on durable goods, scheduled for release on January 25, was delayed.
• Imports and exports: The advance report on international trade in goods, scheduled for release earlier this week, was delayed.
• International markets: Global stocks responded well to news that the Federal Reserve was hitting the pause button on interest rate hikes, closing out a strong month. And after two days of high-level trade discussions between U.S. and Chinese officials, President Trump confirmed plans to meet with Chinese President Xi Jinping to try to finalize a deal between the two countries by March 1. He also announced that U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin would travel to China to further the negotiations in the interim. In the eurozone, fourth-quarter growth was tepid, with reports indicating that Italy had fallen into a recession. Global investors were also concerned about reports that China's manufacturing sector had dipped for the second month in a row, and have been monitoring what happens with Brexit as the March 2019 deadline approaches for a deal to pave the way for the United Kingdom's exit from the European Union.
• Consumer confidence: The Conference Board Consumer Confidence Index® declined in January, following a dip in December. The index now stands at 120.2, down from 126.6 in December. The Present Situation Index, which gauges how consumers feel about current business and labor market conditions, dropped by a minimal 0.3. By contrast, the Expectations Index, which measures how consumers view the short-term outlook for income, business, and labor market conditions, dropped more than 10 points. Lynn Franco, Senior Director of Economic Indicators at the organization, attributed the decline to concerns surrounding financial market volatility and the government shutdown.