Week Ending 12/6/2019


  • Stocks were down by 2.71% early in the week but rallied from there to finish up by 0.17% in the US helped by a strong jobs report.
  • International equities were up by 0.96%.
  • The US added 266,000 jobs, and the unemployment rate hit the lowest level since 1969.
  • The recent rise in copper and fall in gold reflect the change in economic expectations.
  • The ISM PMI falls to 48.1.


It was a tale of two halves (to use a sports cliche), at the low midday Tuesday US stocks were down by 2.71% from the prior week close, but then rallied into the close and then again on Wednesday. Prices were steady on Thursday and then finished up by .89% on Friday on the blockbuster jobs report to scratch out a 0.17% gain for the week. International stocks fared better, +0.96% for the week, and bonds were off slightly, down by 0.08%.


There were 266,000 jobs added in November, the biggest increase since January, and 100,000 more than what economists had forecast. The unemployment rate dropped to 3.5%, the lowest level since 1969. Initial unemployment claims also are historically low at 203,000 for last week. And to top it all off, wages increased by 3.1%. Jobs were added in health care, transportation, and leisure and hospitality.

The strong payroll numbers affirm the Fed’s recent decision to hold rates steady, instead of cutting further. If anything, a strong report like this would normally give the Fed a lean towards raising rates. But Fed Chair Powell has indicated that the Fed would need to see inflation at or above the 2% target for an extended period of time before the next increase.


The recent rise of copper versus the fall of gold has been reflective of market sentiment. As fears of a recession began to fade, and the forecast for a stronger economy began to pick up, copper, an industrial metal has rallied. Meanwhile, gold, which is considered a market hedge, has been falling.


Despite the upbeat news outlined above, manufacturing is still at a weak point. The Institute of Supply Management’s (ISM) Purchasing Manager’s Index was measured at 48.1% in November, down from 48.3% in October, and a decent amount less than the 50% breakeven level that represents the difference between expansion (greater than 50%) and a contraction (less than 50%).

Timothy Fior, Chair of the ISM, said “Comments from the panel were consistent with the previous month, with sentiment improving compared to October. November was the fourth consecutive month of PMI® contraction, at a faster rate compared to the prior month. Demand contracted, with the New Orders Index contracting faster, the Customers’ Inventories Index remaining at ‘too low’ levels and the Backlog of Orders Index contracting for the seventh straight month (and at a faster rate). The New Export Orders Index returned to contraction territory…consumption (measured by the Production and Employment indexes) contracted…Inputs — expressed as supplier deliveries, inventories, and imports — were again lower in November, due primarily to a contraction in inventories that was partially offset by supplier deliveries returning to ‘slowing.’… Overall, inputs indicate (1) supply chains are meeting demand and (2) companies are less confident that materials received will be consumed in a reasonable time period. Prices decreased for the sixth consecutive month, at a slower rate.”


Week Ending 11/29/2019


  • US stocks increase by 1.19% for the week and 3.79% for the month.
  • The GDPNow estimate for Q4 growth increased markedly higher.
  • Q3 GDP growth is increased to 2.1% from 1.9%.
  • The spread between the Present Situations Index and the Expectations Index might indicate an economic turning point.


US stocks moved 1.19% higher for the week while international stocks barely broke even (+0.07%) and bonds were flat. The consensus is that odds of a recession in the next year or so are declining. Q3 growth was revised higher and Q4 estimates also were increased this week on better economic news.

For the month, US stocks were up by 3.79% and international stocks managed a 0.99% gain.


The Atlanta Fed’s GDPNow model estimate for Q4 growth shot higher to 1.7% on the November 27th reading from 0.4% on November 19th. The 1.3% jump is about the largest we can recall in such a short period. Part of the move was due to the increase in durable goods orders, which were up by 0.6% due to higher defense spending.


The second estimate of real GDP growth for Q3 came in at 2.1%, up from 1.9% in the original estimate. The 2.1% growth tops the 2.0% growth in Q2.


Two components of The Conference Board’s Consumer Confidence Survey are the Present Situation Index, which measures consumers’ assessment of current conditions, and the Expectations Index, which measures consumers’ short-term outlook for income, business and labor market conditions. When the difference between the Present Situation Index and the Expectations Index has peaked, it has often preceded a recession. Of course, there is no way to know if the graph below represents a peak or a short-term pause, but it does indicate a possible turning point.


Week Ending 11/22/2019


  • Stocks fall slightly, by 0.23% in the US and 0.52% x-US.
  • Reports earlier today that China will increase penalties on IP theft.
  • The increase in the Fed balance sheet since September has coincided with the recent market rally.
  • Strong reports on residential real estate.
  • Higher threat of leveraged loan defaults.


The market rally went on hold this week as US stocks declined by 0.23% and international equities fell by 0.52%. Bonds rallied as the longer end of the curve saw interest rates fall. The spread between the 2 and 10-year treasuries declined by 7 basis points. Progress on the trade dispute between the US and China also seemed to stall, but it was reported just a couple of hours ago (Sunday – 11/24/2019) that China has agreed to increase penalties on the theft of intellectual property, a major sticking point in the trade talks.


The Fed has increased the size of its balance sheet from about $3.76 trillion in early September to about $4.03 trillion currently. That is an increase of $270 billion in just 2-1/2 months. The purpose of the increase was to stabilize the repo market, and the Fed has claimed that this is not quantitative easing, but the effect is the same. More assets in the system provide more fuel to push equity prices higher. Not coincidentally, the market has been moving higher since the change in policy.


Good news on the residential front, existing-home sales increased 4.6% year over year. That was the fourth consecutive month of higher sales which followed a 16 consecutive month decrease. Building permits for privately-owned housing units were up 5% in October from September and 14.1% year over year.


Analytics firm Credit Benchmark says that a recent survey of data collected from banks, insurers, and asset managers has raised the average probability of defaults on leveraged loans to about 6% in September versus 5.4% one year prior. Leveraged loans are often used by private equity for financing the buyouts of companies. Given the recent run of low-interest rates over the last decade, many companies are now loaded up on such loans. Almost 60% of companies purchased in leveraged buyouts carry debt of more than 6x earnings before interest, taxes, depreciation, and amortization (ebitda). A turn in the economy could lead to trouble for these companies quicker than normal.


Week Ending 11/15/2019


  • US stocks are up by 0.86% as the indexes hit a new record.
  • The Dow breaks 28,000.
  • Kudlow says progress on trade talks.
  • Fed says rates to remain steady.
  • Retail sales up 0.3%.
  • Q4 growth is barely above breakeven according to two Fed bank models.


US stocks managed another advance, +0.86%, but international stocks were unable to follow, declining by 0.07%. Bonds advanced by 0.54% as interest rates fell slightly. The Dow Jones Industrial Average closed above 28,000 on Friday for its eleventh record high of the year. There continues to progress in the US/China trade talks according to White House economic adviser Lawrence Kudlow and the Fed said rates would remain steady for now. US retail sales were up by 0.3% in October, showing that the US consumer is still going strong.

Outside of the markets, the impeachment investigation of President Trump went public this week, with hearings in the House. Bolivian President, and socialist Evo Morales resigned and fled the country.


Stocks have been going up, but GDP forecasts have been headed in the other direction, down. The Q4 forecast for GDP growth comes in at 0.30% for the Atlanta Fed’s GDPNow model, and the NY Fed’s Nowcast registers a gain of 0.39%, both barely above zero.


Federal Reserve Chairman Jerome Powell does not see the need for further rate cuts, in testimony to lawmakers this week. “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth.” Powell went on to state that the Fed, at this time, does not have the ammunition it did in the past to fight a future recession given that interest rates are so low.


Week Ending 11/8/2019


  • US stocks up by 2.42% and international +1.84%.
  • Optimism on US-China trade talks.
  • Stocks appear to be in good technical shape.
  • Bonds fall by 0.72% as interest rates are going up on the longer end of the curve.
  • Negative yielding sovereign debt is down to $11.9 trillion from $17 trillion over the summer.
  • Imports fell, job openings have declined (but still exceed the number of unemployed), and productivity turned negative.


Equities had a big week around the world as “risk-on” appears to be back in mode, the US advanced by 2.42% and stocks x-US were up 1.84%. There is growing optimism that the US will avoid a recession, helped by supposed progress on a US-China partial trade deal, that will result in a rollback on some tariffs.

We showed a chart similar to the one below at the October webinar and described a “wedge” pattern, and the market has clearly broken out to the upside since then. Time will tell if the market can hold these gains and advance further, but stocks appear to be strong from a technical standpoint.

Bonds fell by 0.72% as interest rates further out on the curve increased. The yield on the 2-year Treasury was up by 12 basis points while the 10-year yield increased by 21 basis points. Interest rates have also been increasing worldwide. There is now an estimated $11.9 trillion in negative-yielding sovereign debt, down from $17 trillion over the summer. The 20-year US treasury has lost about 8% since mid-August.

While optimism is winning the day in the equity markets, the economic statistics are still mixed at best, as shown by some recent reports below.


Imports for September fell by 1.7% from August according to the Commerce Department. Consumer goods declined by 4.4%, a sharp drop that might indicate that the US consumer is slowing down on spending and/or that tariffs are beginning to impact sales.


There are still plenty of jobs around and the labor market appears strong, but the number of unfilled jobs was a seasonally adjusted 7.02 million at the end of September, according to the Labor Department. That is is the lowest number in 18 months. However, the number of openings still exceeds the number of unemployed by 1.26 million.


US worker productivity declined in the third quarter, it was the first quarterly decrease since 2015. However,  year over year, productivity was still up by 1.4%. That is in line with the 1.3% average from 2007 to 2018, but lower than the 2.1% annual average since the end of WWII. Economic output is a function of changes in productivity and population growth. With population growth stalling, productivity has to improve for the economy to accelerate its rate of growth.



Week Ending 11/1/2019


Stocks moved into record territory as the US up by 1.55% and international stocks advanced by 1.30%. As anticipated, the Fed cut rates by 1/4% and a strong jobs report indicated that a recession does not appear in the cards for at least the very near term. On the other hand, the Chicago PMI came in at a dismal 43.2, the lowest level since December of 2015, but that number might have been impacted by the GM strike. Q3 GDP growth came in at 1.9%, it was the third straight drop in growth, 10 basis points off the Q2 number. The early GDPNow estimate for Q4 is 1.1%.


The Fed cut interest rates for the third time in 2019 by 1/4 point. The move was widely anticipated by the markets. The Fed indicated that there would need to be a deterioration in the economy for another rate cut.


The US jobs machine put in another strong month, lodging an increase of 128,000 in nonfarm payrolls, and that was after a decline of 41,600 due to the GM strike and 20,000 temporary census workers leaving their jobs. The two prior months were revised up by 95,000. The unemployment rate increased to 3.6% as more Americans entered the workforce. Average hourly earnings were up by 3% year over year.


Through Wednesday, about 75% of S&P 500 companies have reported earnings and 75% have beaten expectations. However, overall profits are forecast to fall by 3.2% from last year. That would make it three quarters in a row of declining earnings. Analysts are expecting positive earnings growth in 2020 and 2021 of about 6 and 7%, respectively, although those estimates will probably come down.


Last week the Treasury Department reported that the budget deficit for the year ended 9/30/2019 was $984 billion, up 26% from the prior year. Tax receipts were up by 4%, while outlays were up by 8.2%. This is now the fourth consecutive year of an increasing deficit and the current shortfall was 4.6% of GDP, which is the largest amount excluding a war or a recession. The worst part is no one in Washington seems to care, under the guise that deficits don’t matter. The risk is that at some future point they will matter, and by then it will be very difficult to deal with.


Week Ending 10/18/2019


Stocks advanced by 0.63% in the US and by 0.92% overseas. International stocks have been outperforming since mid-August. The graph below charts the ratio of US stocks (VTI) to stocks outside the US (VXUS) and the declining black line shows the outperformance of the international stocks.

The market is expecting another Fed Rate cut at the end of the month, and that is providing support to equities. The Fed also has started to increase the size of its balance sheet, buying $60 billion a month of treasury bills, although they are not calling it quantitative easing. The Fed is buying the bonds to ensure that there is enough money around so that the gears of the banking system can move in sync without crashing, as came close to happening last month in the repo market.


Week Ending 10/11/2019


US stocks were up this week by 0.60% and international stocks had a big week, +1.96%. Stocks managed the advance on optimism of a breakthrough on the trade front with China. On Friday, it was announced that China would buy more US farm products and the US would hold off on further tariffs. The agreement was characterized as “phase one.” There was even a hint of some progress with Brexit. US stocks are now only 2% off the all-time high. Bonds dropped by 1% on higher interest rates and the 3-month/10-year curve went back to normal status (not inverted).


Job openings were 4% lower than one year ago, the third straight monthly decline. That hasn’t happened since 2009. However, August’s job postings overall still were greater than the number of unemployed by about 1 million.


Two top World Bank officials warned that “the global economy is now in a synchronized slowdown,” those were the words of Kristalina Georgieva of Bulgaria, the no. 2 official at the World Bank. David Malpass, who is the World Bank’s President, referring to their June forecast of 2.6% global growth in 2019, said: “We now expect growth to be even weaker than that, hurt by Brexit, Europe’s recession and trade uncertainty.” International Monetary Fund research shows that the cumulative economic loss from the trade war could amount to $700 billion by 2020. That would represent about 0.8% of global gross domestic product.