Weekly Market Commentary January 24th to January 31st 2020
The final week of January picked up where it left off last week as concerns relating to the Coronavirus caused market instability worldwide. The World Health Organization declared the epidemic, which has infected nearly 10,000, a global health emergency. This rare designation will ultimately allow the agency to mobilize financial and political support to contain the outbreak. Look for continued market volatility until containment plans show a slowing in the spread of the disease.
On the economic front, the major releases of the week started with fourth quarter Gross Domestic Product (GDP). In the first estimate of the quarter, GDP came in at an expected 2.1%. When averaging this with the previous three quarters, GDP for the year 2019 was 2.3%. For perspective, US GDP at 3-4% means the economy is firing on all cylinders. This 2.3% is a good/not great scenario which ultimately shows a healthy, growing economy with some upside potential. The Federal Open Market Committee acknowledged the current conditions by keeping interest rates unchanged at their January meeting this week as expected.
We received some disappointing housing news this week when New Home Sales came in at -4.9% from the previous and a -3.1% revision to last month. Expectations were for a 1.5% increase. Pending Home Sales also were down by -4.9% when the forecast was for 0.7%. Despite these signs of softening, New Home Sales are still near post-recession highs amid lower borrowing costs.
Durable Goods Orders beat estimates of 0.5% and came in at 2.4% thanks mainly to strength in transportation orders. The Ex-Transportation Orders fell -0.1%. New orders for non-defense capital goods fell the most in nine months as demand for machinery, metals and electrical equipment, and appliances/components declined.
There was firmness shown by the harder consumer statistics as Personal Income and Spending both came in basically flat to expectations at +0.2% and +0.3% respectively; while the softer, poll-based Consumer Confidence levels continue to defy expectations. The Conference Board’s Consumer Confidence Index hit a five-month high at 131.6 and the University of Michigan’s Sentiment Index rose to 99.8 on expectations of a 99.1 print. Time will tell if the confident American consumer’s behavior will trickle down to the harder consumer statistics such as Retail Sales and Personal Spending.
Lastly, the Core PCE Deflator, a primary measure of inflation, continues to flummox the Fed by staying range-bound at 1.6%. The Fed has long called for inflation of 2% but can’t quite pull the right levers to get there. Look for the possibility of the Fed eventually changing its views on what the new norm for inflation might be going forward.
In the fixed income world, 10-Year U.S. Treasuries rallied with the yield falling to 1.51% over the week, closing 17 basis points lower. The yield curve ended the week neutral with the 2-Year/10-Year U.S. Treasury spread hovering at 20 basis points.
Continued fears relating to the deadly Wuhan Coronavirus in China and the impeachment trial of President Trump dominated the headlines and pressured equity markets. In contrast, generally positive earnings reports supported several of the mega-cap names such as Apple and Amazon. The S&P 500 Index was lower on the week by -2.1% to 3,226. The tech-heavy Nasdaq followed suit and declined -1.8% to 9,151 to close out the week.
Key economic reports next week include the monthly employment report from the US Bureau of Labor Statistics, the Institute for Supply Management (ISM) manufacturing and non-manufacturing reports, factory orders, and construction spending.