Well, that wasn’t fun. Prior week gains on Powell’s comments and de-escalating trade conflict (news that the U.S. would delay tariffs on Chinese imports while a new trade pact was negotiated) carried a positive sentiment into Monday. Unfortunately, that momentum turned decidedly to the south the remainder of the week with hardline comments from POTUS and a considerably different Chinese perspective on G20 talks relative to the POTUS narrative. That said, while international equity markets have moved much more decidedly to the downside, the S&P 500 is only a little more than 10% off it’s 52-week high and is essentially flat for the year. U.S. equity markets were off 4%-5%, commodities posted gains thanks to oil gains, and bond yields fell sharply on a flight to quality rally.
- Valuations, election cycle, earnings, low interest rates, and U.S. economic trajectory remain constructive considerations while outlooks on oil, China, and the Fed are driving volatility higher.
- Roller coaster? Tuesday was “Tariff Man”, Wednesday welcomed a conciliatory POTUS and China announced U.S. soy and LNG purchases, Thursday produced an arrest of a Chinese tech executive in Canada for violation of Iranian U.S. trade sanctions. Not a sleepy week.
- China expressed confidence of doing a deal inside of the 90 day ‘truce’ but markets participants remain skeptical. Intellectual property rights protections, cyber-attacks, forced tech transfer are sticky issues.
- Supporting the stance that negotiations have a long way to, U.S. Trade Representative Robert Lighthizer (aka ‘the heavy’) issued a hawkish report concluding that China has not substantively changed any of the trade practices that initiated U.S. tariffs.
- The growth slowdown in China has been centered on domestic demand, not trade. Through October, Chinese exports to the U.S. are up 13% over last year’s pace.
- 13 of 23 major global markets are in bear market territory. Meanwhile, the S&P remains stuck in the 2600-2800 range. Sentiment measures (put/call, credit spreads) suggest equity markets have not yet reached clear ‘market bottom’ levels.
- High yield spreads did not recover along with the equity markets in the last week of November and widened considerably last week, now at their highest levels since December 2016.
- The Fed has been stressing a wait and see data dependency approach, striking a much less hawkish tone over the past three months. Futures are pricing in a 72% likelihood of a 0.25% December rate hike but 2019 has become much less clear.
- In the eight recessions we’ve experienced since 1960, none have been preceded by a real short-term interest rate below 2%. Current real short rates are hovering near 0%.
- With all the attention on curve inversions last week (2-10 spread hit its lowest level since 2007), we feel compelled to remind investors that the 2-10 inversion associated with the last three recessions saw equity markets peak an average of 632 days after the initial inversion and generated an average annualized gain of 16%.
- Strategas estimates $598b of repatriated earnings in the first three quarters of 2018 and between $200-$250b next year. YTD buybacks and dividend increases total $217b, leaving notable dry powder for wages, mergers, investment, pensions, and debt reduction.
- The EIA reported that the U.S. became a net exporter of oil in November for the first time since 1949.
Economic Release Highlights
- A 59.3 November ISM Manufacturing Index reading accelerated to unusually strong levels driven by strong new orders (62.1) and building backlogs. An easing in input costs was a welcomed anecdote.
- A 60.7 November ISM Non-Manufacturing Index beat the high end of estimates and posted a third consecutive 60+ monthly reading. Elevated cost pressures and stretched delivery times pointed again to capacity stress.
- November jobs report of 155,000, an unchanged 3.7% unemployment rate, and a modest 0.2%/3.1% average hourly earnings result were welcomed and very pedestrian figures.
- December UofM Consumer Sentiment held steady at a robust 97.5 level, an encouraging metric for the upcoming holiday shopping season