for Week Ending December 6th, 2019
WEEKLY MARKET SUMMARY
Global Equities: Conflicting PMI data and flip-flopping trade headlines added volatility to the US equity indices and an unusually sharp sell-off early in the week. The major indices ended the week mostly flat, just off new all-time closing highs, after Friday’s employment situation report showed continued and surprising strength in the US labor market. The previously slumping energy sector led all others, helping to boost the S&P 500 Index to a 0.10% weekly gain, while the Dow Jones Industrial Average and the Nasdaq Composite Index slipped around 0.13% each. International equities fared slightly better, as the developed market proxy, iShares MSCI EAFE Index ETF (EFA) rose nearly 0.73% ahead of next week’s general election in the UK. Emerging markets led the pack, as the iShares MSCI Emerging Markets ETF (EEM) gained over 1.22% on the week.
Fixed Income: Interest rates on longer-dated US bonds were volatile during the week as well, with the yield on the 10-year US Treasury Note collapsing below 1.70% on Tuesday, before finishing the week higher, near 1.84%. The positive employment data diminished the idea of the Federal Reserve moving from the current neutral policy stance back to an easing bias ahead of next week’s Fed interest rate policy decision. High yield bonds performed even better than US equities during the week, as the iShares Iboxx High Yield Corporate Bond ETF (HYG) returned around 0.4% despite Lipper reporting net outflows of $154 million from high yield funds for the week ended 12/4.
Commodities: An OPEC meeting during the week ended with the group and Russia agreeing to deeper production cuts for the 1st quarter of 2020. Rumors from the meeting and equity market action played havoc on oil prices during the week, though the ultimate outcome boosted the energy sector by nearly 1.50% and the West Texas Intermediate (WTI) crude oil benchmark by an eye-popping 7%. The International Brent crude oil benchmark appreciated only 3%, ending the week near $64.25 per barrel. Gold prices were knocked around with the risk-on atmosphere late in the week, to end near $1,465 per ounce.
WEEKLY ECONOMIC SUMMARY
50 Year Low Unemployment: Nonfarm payrolls growth for November came in at a blockbuster 266k versus expectations of 180k, while the change for the previous month was revised higher by 28k to 156k. Expectations were already elevated due to a quirk associated with the striking General Motors workers returning to work. The unexpected boost dropped the unemployment rate to 3.5%, a new 50-year low. Average hourly earnings remain subdued at an expected 3.1% year-on-year growth rate, while the average workweek stayed flat at 34.4 hours.
Confident Consumers: The tight labor conditions continue to contribute to strong trends in consumer confidence, per the preliminary University of Michigan Consumer Sentiment Survey for the month of December. Coming in at 99.2 versus the previous 96.8 and expectations of 96.9, this month’s result was driven primarily by a jump in current conditions, signaling that the US consumer is in high spirits heading into the all-important holiday season and bolstering GDP’s largest contributor as this decade ends. Expectations for inflation moderated for surveyed participants, dropping from 2.5% to 2.3% for the period 5-years into the future.
Narrowing Trade Deficit: A narrowing trade deficit is set to boost 4th quarter GDP despite imports and exports being lower for the month of October, as the difference between the two measures goes straight into the calculation of GDP. The trade deficit of $47.2B for the month was the lowest in 16 months, as a 1.70% fall in imports outpaced the 0.20% decline in exports. This was mainly driven by falling imports of consumer goods that were sucked forward into previous months ahead of threatened trade tariffs on China. The combination of the dip in the deficit and the falling unemployment rate led to the Atlanta Fed’s GDPNow 4th quarter estimate to be revised up to the strongest level so far, at 2%.
CHART OF THE WEEK
The Chart of the Week shows a year-to-date chart of the iShares 20+ Year Treasury Bond ETF (TLT), representing the performance of long duration US Treasury bonds. Moving inversely of long-term interest rates, TLT is again slipping below its 50-day moving average (blue line) after another strong US employment report lowered the odds for future accommodation from the data-dependent Federal Reserve, which is expected announce unchanged policy after next week’s meeting. We currently have no tactical exposure to long-term US Treasuries, though they remain included as an underlying holding in the actively managed bond fund included in appropriate Hanlon Strategic and All-Weather Models.
Chart courtesy of StockCharts.com. Commentary, and opinions are those of Hanlon Investment Management.
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