Markets established a new high again as investors relentlessly watch trade, Fed developments
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Nov. 18, 2019
U.S. equities made it six straight weeks of higher prices in a rally that has now produced a gain of 8 percent and established one new high after another. The S&P 500 is now higher on the year by 24.5 percent. Should it end the year at its present level, it would be the best yearly performance for the index since a 30 percent gain in 2013.
There wasn’t an abundance of market moving news last week. Federal Reserve Chairman Powell testified before Congress and successfully managed to reinforce the idea that while the Fed is on hold, it could lower rates further if conditions deteriorated. The economic calendar contained no real surprises. Retail sales rose, but weren’t exactly robust, while industrial production fell more than expected. Both reports reinforced well-established trends.
Rally extends to global markets, but not to bond yields
In one notably divergent move, bond yields did not rise concurrently with stocks. During the first five weeks of the rally, the yield on the ten-year note had climbed from 1.53 percent to 1.94, before backing off last week to 1.83 percent. Not that it mattered to stocks overall, as the S&P 500 tacked on another 0.9 percent for the week, but it was a notable change. And that divergence did result in a reversal of some of the sector trends that had been in place throughout the rally. Healthcare was last week’s best performing sector, after having been in the middle of the pack throughout the previous five weeks. Utilities, real estate, and consumer staples all delivered solid gains last week, after having declined since October 4. And the rally’s previous best performer, financials, fell last week. The one consistent gainer throughout, including last week, was technology.
The rally extended globally as well, as the MSCI EAFE index of foreign developed markets also made it six straight weeks of gains. In the Eurozone, third quarter growth was slightly better than expected, and industrial production unexpectedly rose in September. Germany avoided recession in the third quarter, although second quarter growth was revised lower. In Japan, third quarter growth was softer than expected. The MSCI EM equity index was the notable exception last week. It fell 1.5 percent, unable to overcome weakness in Asia and a second straight week of declines in Latin America.
Investors continue to keep an eye on trade, federal budget
Investors continued to hang on to every optimistic word regarding the status of the trade negotiations, the most recent being White House economic advisor Larry Kudlow’s remarks on Thursday that negotiation on a phase one deal was “coming down to the short strokes”. However, on the same day, the Chinese Ministry of Commerce reiterated its position that any deal would depend on the U.S. removing some, if not most, of the tariffs already in place. To the extent that the scope of what is likely to be included in a phase one deal has been well telegraphed, its actual completion may prove to be a “buy the rumor, sell the news” event. Of course, the deal could always contain some positive surprises. But it has taken us eighteen months to get this far, suggesting the chances for an unexpected breakthrough are slim.
Lastly, in his remarks to Congress last week, Fed Chairman Powell warned that the federal budget is on an unsustainable path, with high and rising debt. Ironically, on the same day, the Treasury Department announced that the budget deficit for October, the first month of the 2020 fiscal year, had widened by 34 percent from the same month last year. It was just three weeks ago that the Treasury announced that the fiscal 2019 deficit had grown to $984 billion, a 26 percent increase over 2018. Unsustainable indeed.