HIGHLIGHTS

• Stocks are up by 3.2% in the US and 2.1% x-US.
• Another strong jobs report.
• Macy’s to lay off 2,000.
• Tesla’s stock continues burning higher.
• Solid ISM report.
• The trade deficit falls slightly.
• A disaster for the Iowa caucuses.

MARKET RECAP

Stocks had a big week advancing by 3.2% in the US and by 2.1% around the world. Bonds fell by 0.38%. Stocks were all but oblivious to the fact that a good portion of China has been paralyzed by the coronavirus. Markets were probably helped when China pumped billions of dollars into their economy to help offset the economic impact of the virus. Tesla’s stock has been on a parabolic rampage (see below).

JOBS

The job market continues to be the strong point in the US economy. The US added 225,000 jobs last month, the unemployment rate ticked up to 3.6% from 3.5% due to an influx of new workers, and wages climbed by 3.1% compared to last year. Some of the job gains were attributed to mild weather in January. The three-month average of 211,000 is now trending above the 12-month average of 175,000.

But while jobs across the entire US economy are strong, brick and mortar retailers continue to be hammered, especially department stores. Macy’s announced that it will close 15 stores over the next three years and eliminate about 2,000 jobs.

TESLA

In a move reminiscent of bitcoin or some of the internet highflyers from 1999/2000, TSLA was up by 447% from its June 3rd intraday low to its intraday high on Tuesday (2/4/2020). The stock closed the week down 22.7% from that point. The Company, which has been a favorite of the bears, has turned around investor sentiment from possible bankruptcy, too, according to famed investor Ron Baron, a possible $1 trillion in revenues within 10-years. Currently, Tesla has a free cash flow yield of 0.8%, and at its current market cap, Tesla is selling for $367,000 for each car delivered in 2019, while GM is valued at $6,400 per car, and BMW is at $17,000 per car.

ISM

The Institute for Supply Management’s manufacturing index came in at 50.90, back in expansionary territory for the first time since July and up from 47.8 in December. The survey was mostly conducted before the coronavirus outbreak. “The outbreak of the novel coronavirus in China is likely to significantly disrupt activity in 1Q20. The inevitable disruptions to China, as well as potential spillovers to the rest of the world, should become visible starting with the February report,” according to J.P. Morgan economists Joseph Lupton and Olya Borichevska.

TRADE DEFICIT

The US trade deficit fell for the first time since 2013 to $617 billion from $628 billion last year. Exports fell for the first time since 2016, but imports fell even more, obviously due to tariffs. China dropped to third place as the biggest US trade partner, behind Canada and Mexico. A smaller deficit is likely a sign of weaker demand and slower worldwide growth.

IOWA

The primary season officially got underway with the Iowa caucuses on Monday. Unfortunately, it pretty much turned into a disaster due to software problems. Results still are not complete yet, but so far Pete Buttigieg and Bernie Sanders are about tied with each getting about 26% of the delegates.

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HIGHLIGHTS

• US stocks drop by 2.2% and international stocks were off by 3.38%.
• Bonds advanced by 0.76%.
• Fears of the coronavirus set stocks back.
• Q4 growth was 2.1%, 2.3% for the year.

MARKET RECAP

US equities fell by 2.2% on the week on fears of the spread of, and economic impact from, the coronavirus. Since the virus broke out on January 17th, stocks are off by 3.11%. The timing is about in line with the market peak in January of 2018, stocks were on a daily climb similar to what we have seen this year, almost every day until January 26, when trade war talk triggered a quick 10% drop. Time will tell whether we get a similar follow-through this time around.

International stocks took a bigger hit, down by 3.38%. Investors fled into treasuries, advancing bonds by 0.76%. The 3-month/10-year yield curve inverted, as the yield on the 10-year Treasury bond dropped by 19 basis points to 1.51%.

CORONAVIRUS

There are now six cases of coronavirus confirmed in the US, and about 10,000 around the world, and there have been 200 fatalities. The economic impact is being felt in China. Hong Kong suspended high-speed rail to China, and reduced airline flights. The Shanghai Disneyland has closed and Starbucks has temporarily closed about 1/2 of their stores. Airlines have canceled many flights to and from. Millions of Chinese are in lockdown. Chinese stocks are down by about 11% since the outbreak. Sectors that have been hit by the virus (in terms of equity prices) are airlines, tourism, and oil and gas.

Believe it or not, the name though has created some confusion, as some actually think the virus and the Corona beer are connected. Search engines have been flooded with inquiries about the “beer virus” or the “corona beer virus”.

Q4 GROWTH

The Bureau of Economic Analysis reported that Q4 GDP grew by 2.1%, in line with Q3. For the year, GDP was up by 2.3%. Personal consumption, which comprises 2/3 of economic activity, rose by 1.8%, the slowest rate in three quarters.

EARNINGS

At the halfway mark of earnings season, 2/3 of S&P 500 companies that have reported have beat their estimates. Solid reports from market leaders Apple, Tesla, and Amazon have helped. Earnings for the quarter are now expected to be down 0.3% from last year, versus the original -1% estimate. The 2020 estimate looks for a 9% gain. Of course, that will come down with time.

BREXIT

It has been 1,316 days since British voters decided to leave the EU, and here it is. The UK has now officially left the European Union. There is now an 11-month transition period where the two parties will try to reach some sort of deal.

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2020 REVIEW AND OUTLOOK

We published our 2020 Review and Outlook today. Hear about:

1. Our review of 2020
2. Current economic indicators
3. Valuation measures
4. A look going forward.

You can watch the video at this link (it is only 15-minutes):
https://youtu.be/T5AYAkpb71k

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MARKET RECAP

US stocks were up by 2% and international stocks advanced by 1.40%, bonds were mostly flat. The US and China signed the phase-one trade deal. China will spend $200 billion to help close the trade imbalance, China will avoid currency manipulation and will do more to minimize theft of American technology. The agreement does not address the Chinese state-backed hacking of US companies and government institutions, it does not address state subsidies of Chinese companies. The US says those issues will be addressed in subsequent agreements.

The US will maintain tariffs on the majority of imports from China until further reforms are agreed to. Ultimately, “this deal will work if China wants it to work,” according to US Trade Representative Robert Lighthizer.

In the meantime, the deal lowers trade tensions and hopefully will lead to further successful negotiations between the two countries.

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HIGHLIGHT

• Stocks advance as the Iranian conflict fades.
• Valuation measures are tilting towards the expensive side.
• A decent jobs report.

MARKET RECAP

Iran retaliated for the killing of Iranian general Qassem Soleimani by firing several missiles that resulted in no deaths, and some minor property damage. The market viewed that as a plus, as it appeared that Iran was “standing down”, in the President’s words, and there would be no further escalation, at least for now. That bit of good news was enough ammunition to move the markets up by 0.7% for the week.

We have written in recent weeks that valuation measures have been getting expensive. That was brought up several times this week in the media and is discussed in today’s Barron’s. The chart below from Charles Schwab shows that by most measures, stocks are expensive.

However, there are a couple of measures in the bulls’ corner. The Rule of 20 states that if the sum of the p/e ratio and inflation is equal to 20, stocks are fairly valued. Less than 20 is undervalued and greater than 20 is overvalued. With a forward p/e of about 19 and inflation at about 2%, the market would be about at fair value. When looking at the earnings yield (earnings/price) of 5.29%, less the yield on the 10-year treasury of 1.83%, the difference of 3.46 indicates an undervalued market.

So of the six valuation measures shown, three are very expensive, one is expensive, one is fairly valued and one is inexpensive. We lean to the expensive side. But given the technical strength of the market both in the US and overseas, the rally can certainly continue.

JOBS

The Bureau of Labor Statistics reports that 145,000 jobs were created in December, less than the projection of 160,000. The two previous months were revised down by 14,000.  While less than consensus and less than last month, employment increases of around 150,000 or so indicate solid growth. The disappointing number was wage growth, which was up by only 1%. That was the lowest number since Q4 of 2017 and among the weakest in the last five years. However, net-net, this is still a decent report.

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HIGHLIGHTS

• Stocks close out 2019 with a 30.67% gain in the US and 21.75% outside the US.
• A small fall for the week after news that a US drone takes out an Iranian general.
• US and China to sign the phase-one trade deal on January 15.
• The ISM manufacturing index falls for the fifth month in a row.
• The Fed’s increase in assets since late August has coincided with a 13% market advance.
• Shiller warns about the CAPE ratio.

MARKET RECAP

Stocks closed out 2019 with a 30.67% gain in the US and 21.75% outside the US. Bonds were up 8.46%. It was an amazing year.

For the week overall, stocks lost a little bit of ground, down 0.09% in the US and 0.50% x-US. The market got off to a good start on Thursday, the first trading day of the year, setting a new high and up 0.83%. But on Friday stocks closed down by 0.64%, on news that a US drone killed a top Iranian general, Qassem Soleimani. It was reported that Soleimani was planning further attacks on US forces.

In other news, the US and China are set to sign the phase-one trade deal on January 15th and to begin talks on phase-two shortly thereafter. The ISM manufacturing index fell to 47.2 in December from 48.1 in November. It was the fifth consecutive decline.

The Fed has increased its assets by $410 billion since late August. That is about when the market went on its run to close out the year, the S&P500 was up by 12.75% during that period.

There seems to be a lot of complacency in the market, there is almost no fear. The CNN Fear & Greed Index was up to 97 out of a possible 100 on Thursday but closed at 93 on Friday, still in the Extreme Greed category, but valuations, at least by one measure, are very high.

Robert Shiller, Nobel Prize winner and developer of the Cyclically Adjusted Price Earnings (CAPE) ratio wrote in the New York Times on Thursday, that the CAPE ratio currently stands at 31, just short of the recent high in January of 2018. Only two times in history has the ratio been higher, 1929, just before an 85% crash, and in 1999, before a 50% drop. Shiller attributes today’s high values to a “trust your gut” kind of mentality, versus an evaluation based on science and math. Shiller writes, “We have a stock market today that is less sensible and orderly than usual, because of the disconnect between dreams and expertise.”

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A good column by Nick Kristoff which gives us reasons to be optimistic.

MARKET RECAP

Stocks advanced again, by 0.48% in the US and 1.10% outside the US. International stocks have outpaced their US counterparts so far in December, up 4.8% versus 3.1% in the US.

According to a report by Mastercard Spending Pulse, holiday shopping from November 1st to December 24th was up by a strong 3.4%. And Customer Growth Partners, a retail firm that provides research on retailers, calculates that the Saturday before Christmas was the biggest single shopping day in US retail sales, totaling $34.4 billion.

There was also good news for workers. Wages are rising a the fastest pace in more than a decade. Pay for the bottom 25% of wage earners was up by 4.5% in November according to the Federal Reserve of Atlanta.

The risk is that higher wages are sometimes a leading indicator of future inflation.

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HIGHLIGHTS

• US stocks hit a new record every day this week, up 1.77% for the five days.
• Market sentiment is extremely positive, the exact opposite of one year ago.
• But some traders are betting on a decline in the S&P 500 in a few months.

MARKET RECAP

Stocks continued their relentless advance, hitting record highs every single day of the week. In the US, equities were up by 1.77% and outside the US, +0.88%. Since October 28th, when the US stock market broke through resistance, stocks are up by 7.7%.

However, one year ago at this time, it was just the opposite. US stocks hit their low on 12/24/2018, having fallen by 16.3% since 12/3/18. Market sentiment was about as negative as possible. CNN’s Fear and Greed Index showed extreme fear at the time, measuring a 5 out of a possible 100. That is in contrast with the reading on Friday of 91, indicating extreme greed.

BEARISH BETS

One place that isn’t showing extreme optimism is the Skew Index. Bearish bets on the fall of the S&P 500 have been increasing in recent months. The CBOE Skew Index, which measures trader expectations of extreme moves in the stock market, reached its highest level since September. Likewise, the cost of options betting on a falling market versus those betting a higher market has been near the highest levels of the year.

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HIGHLIGHTS

• US stocks up by 0.65% and international stocks by 1.74%.
• The p/e on the S&P 500 is almost at the year-end record set in 2017.
• US and China reach a “phase one” trade deal.
• Democrats agree to support the North American trade pact.
• Boris Johnson wins in the UK.
• Retail sales fall short.
• Volker’s final note.
• Spending spree by governments around the world.

MARKET RECAP

Stocks were up again on several positive developments. The US advanced by 0.65% and international stocks jumped by 1.74%. The US and China reached a “phase one” trade deal, the Democrats have agreed to support the North American trade pact (with some minor changes), Boris Johnson’s Conservative Party had a runaway victory in the UK, and both the Federal Reserve and the European Central Bank announced that low-interest rates would continue. Now it is true that the market had anticipated most of this, but at least they are in the bag now. We will see if the market “sells on the news.”

Stock prices have gone up, but earnings estimates haven’t. The estimate for earnings on the S&P 500 is now $162.06, down 6.8% from the projection at the end of 2018. The S&P is now selling at a price/earnings ratio of 19.55, just shy of the highest year-end ratio of 20.25 level (since 2004) reached at the end of 2017, indicating that stocks are getting expensive based on this metric.

PHASE ONE TRADE DEAL

The US and China agreed to a limited trade deal. Existing tariff rates on Chinese goods will be reduced by about half, the new levies that were set to start on Sunday will be canceled, and China will buy $200 billion over two years of agricultural goods, along with energy and other products, in 2020. If China fails to follow through, the tariffs will be reinstated.

Key US issues such as subsidies to Chinese businesses and technology transfer do not appear to be part of this deal.

RETAIL SALES MISS ESTIMATES

Retail sales fell short of estimates in November. Sales were up 0.2% compared to an expected 0.5%. Take out autos and gas and sales were flat. The disappointing report follows an October when sales exceeded expectations.

PAUL VOLKER’S FINAL NOTE TO AMERICANS

Paul Volker, the legendary former Federal Reserve Chair who broke the back of inflation in the 1980s, passed this week. In an essay published in the Financial Times posthumously, Volker said, “When I was writing my book, I observed that President Donald Trump had not attacked the independent U.S. Federal Reserve, for which I was grateful. To say that is no longer true would be an understatement. Not since just after the second world war have we seen a president so openly seek to dictate policy to the Fed. That is a matter of great concern, given that the central bank is one of our key governmental institutions, carefully designed to be free of purely partisan attacks. I trust that the members of the Federal Reserve Board itself, the members of Congress responsible for Fed oversight, and indeed the public at large, will maintain the Fed’s ability to act in the nation’s interest, free of partisan political purposes.”

POLITICIANS GONE WILD

The election of Boris Johnson as UK Prime Minister will bring along a surge in government spending. Johnson has promised voters $128 billion in infrastructure spending and billions more on healthcare.

The UK will be the latest government to go on a wild spending spree. The US is a leader of the pack, as the US budget deficit topped $1 trillion in the fiscal year ended 9/30/2019.  Japan just approved a $120 billion stimulus plan.

Adam Posen, from the Peterson Institute for International Economics, thinks the public spending is needed. Low-interest rates and investing in infrastructure that needs improvements could bring a positive payoff. But Ken Rogoff, an economics professor at Harvard, says that governments need to be aware that low-interest rates may not last forever, “The notion that it’s just free, that we can just spend more money and no one’s going to pay for it, is very naive,” he said. We agree.

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