Penultimate

Penultimate.  Stocks were unchanged on Friday on light trading as markets rolled with the positive tide toward the year end. Low volume meant that traders could sit back and enjoy the last few sessions of the decade.

 

N O T E W O R T H Y

 

• What’s hot, what’s not.  As we roll into this penultimate trading session of the decade, one can’t help but look back on this topsy turvy, but altogether positive year for investments.  For today, let’s ignore the global economy and political news and just focus on the markets.  Plain and simple, stocks are up and at all-time highs, bonds are up, gold is up, crude oil is up, Fed funds are down, and volatility is down.  All in all, calm and focused investors had a good year.  Even hedge funds made money this year, although their performance was less than spectacular with the Credit Suisse Hedge Fund Index rising only +7.58% year to date.  Perhaps that’s why for a fifth straight year more funds have closed than opened.  With all that said, many of us are wondering whether we can see a continuation of this spectacular growth in 2020. Common wisdom suggests that 2020 will be a tamer year as corporate earnings growth is expected to continue to decline.  But if you recall, that was sort of what analysts were also saying coming into this past year… you see how that prediction worked out. Anyway one thing IS certain: stock valuations are on the rich side.  If we look at the P/E ratio of the S&P 500, it is currently trading at 21.66x.  At this time last year the P/E was 16.53x.  At the end of 2017 with stocks surging in the wake of the Tax Act, valuations were high as well with a P/E of 21.81x.  For reference, the last time stocks were this rich prior to 2017 was in September of 2009 and the reason for that was the epic bounce that occurred in the markets after hitting their lows resulting from the financial crisis.  If we look to emerging markets, we see that stocks are a bit cheaper having been victimized by an economic slowdown and, of course, the trade war.  The MSCI Emerging Markets Index is currently trading at 15.57x which is not by any means a bargain, but still not quite as hot as US markets. With the possibility that trade tensions will ease further and a hopeful signing of the Phase One agreement in January, perhaps emerging markets will have a chance to shine in 2020.  We will be watching.
• Tightness.  Economists are obsessed with the labor markets, and for good reason: it all starts with jobs.  I go through this logic often in my notes but here it is again, for reference.  When people have jobs they spend money and when they spend money the economy grows.  All good, right?  Of course the downside to all that spending might be inflation, though that has not proven to be a problem yet.  Ok, so what about wages?  Wage growth is good for consumers because it allows them to spend more money which is also good for economic growth.  Companies are forced to raise wages when workers become more scarce. After the financial crisis, wage growth dipped and then went sideways until mid 2015 when it began to tick up.  That was right around the time when the unemployment rate dropped below 5% for the first time since right before the last recession.  Needless to say, the unemployment rate continued to drop and currently sits at 3.63%, a fifty-year low.  The result is higher wage growth, which is now at an annual rate of +3.1%.  As companies are faced with higher labor costs, they will begin to feel the pressure to raise prices to maintain profitability.  The price hikes become what we commonly refer to as inflation. To sum things up: the labor market is getting tighter which has led to increases in wages, which can ultimately lead to inflation.  Some bit of good news in wage growth: the recent surge in hourly wages is not limited to high-end earners.  In fact, according to the Atlanta Fed, low earners’ wages are growing at +4.5% annually, compared to high earners whose wages are growing at just +2.9%.

 

THE MARKETS

 

Stocks were mostly unchanged on Friday in a low volume, low stress session.  The S&P500 ended the session break-even, the Dow Jones Industrial Average ticked up by +0.08%, the Russell 2000 slipped by -0.51%, and the NASDAQ Composite Index fell by -0.17%.  Bonds traded up and 10-year treasury yields slipped by -2 basis points to 1.87%.  Crude oil continued its rise, climbing by +0.06% to 61.72 on lower supply and hopes that a recovering China will increase demand.

 

NXT UP

 

– Chicago Business Barometer is expected to be 47.9 up from last month’s read of 46.3.

– Pending Home Sales may have grown by +1.5% month over month, compared to last month’s decline of -1.7%.

– Dallas Fed Manufacturing Activity Index is expected to be 0.0 besting last month’s -1.3 indication.

– Tomorrow will be a full session for stocks, though bond markets will close early at 2:00 PM. Markets will be closed for New Years Day on Wednesday.  The week’s economic numbers include housing prices, the Conference Board’s Consumer Confidence Index, manufacturing PMI’s, FOMC Minutes, and Construction Spending.  Please refer to the attached economic release calendar for details.

 

Just days away

 

I will be in the Boca Raton and Miami office meeting with clients next Thursday and Friday.  Please reach out and set up some time to chat.

 

daily chartbook 2019-12-30

 

econ numbers 12_30