Several moving parts behaved nicely last week, providing a lift to equity markets globally. Signing of the Phase 1 trade deal, senate approval of the USMCA, encouraging economic reports, and a good start to Q4 earnings season all fell on the positive side of the ledger. All major U.S. equity market indices marked new record highs during the week, while bonds and commodities lost a bit of ground.
- The U.S. and China trade deal changes the way disputes are settled. Rather than arbitration through international institutions (WTO), U.S. and China will negotiate directly leaving both sides the option of reinstating tariffs if not satisfied with the result.
- China committed to purchase $200b of U.S. goods over the next two years and will develop an ‘action plan’ over the next month to address IP rights.
- Chinese economic data released last week including industrial production, fixed asset investment, and retail sales suggest a recovery is underway.
- Eurozone and U.S. ESI’s both in positive territory for the first time since April 2018.
- The impeachment trial of POTUS got underway last week but the lack of market response suggests the Senate will not vote to convict.
- Arbor Research says a Bloomberg article pointing to Fed’s ‘new QE’ as the driver behind the strong market rally since last fall is missing the obvious – the global growth slowdown is over.
- The high yield market rally has arguably been more impressive than the equity market rally with 30 straight days of gains on a total return basis – there have been only 5 streaks over 25 days since 2000.
- Percentage of S&P 500 stocks above the 50dma (82.2%) and 200dma (84.4%) are both near the highest readings since 2016. 23.9% of S&P 500 stocks closed as net new highs last week – another ST overbought indicator. The A/D line also set a new high on Friday.
- The Wilshire 5000 Total Market Index is 155.4% of GDP, a metric that peaked at 140.7% at the end of the tech bubble in 2000.
- There has been extra media focus on the top five stocks in the S&P 500 as they soak up 17.3% of total market cap, higher than the prior peak in 2000 (17%). However, the valuation difference is material (27.8x vs 56.8x) as is the P/E spread over market (5.5 vs 33.8).
- 3Q flow of funds data show foreigners as the largest holder of U.S. treasuries (36%), monetary authorities were the next largest at 12.5%.
Economic Release Highlights
- December’s headline and core CPI both came in at a 2.3% annualized clip.
- December’s headline and core PPI came in at 1.3% and 1.1% respectively.
- December’s retail sales report provided a constructive view on consumer spending. Headline number rose 0.3% but all subcomponents beat expectations including both ex/autos (+0.7%) and the control group (+0.5%).
- The January housing market index posted one of its strongest reads in 34 years at 75.
- December’s housing starts (1.608M) and permits (1.416M) both came in strong.
- UofM consumer sentiment reading for January (p) came in near consensus at 99.1, holding onto most of the 2.5-point jump higher in December.
- December industrial production of -0.3% hit consensus but the manufacturing sub-component surprised on the upside (0.2%a vs -0.2%e).
- November JOLTS report revealed notably fewer job openings than expected (6.8M-a vs 7.1M-e).
- China grew 6% in 4Q and 6.1% over the course of 2019, its lowest annual growth rate since 1990 when the country’s birth rate plummeted to a record low.