The stock market continued to rally last month with the S&P 500 rising 3.4% and setting new all-time highs. Many economic indicators remain mixed with job creation and consumer spending inspiring the market rally, but waning consumer confidence and declining business activity yielding concerns for some investors. (1)
Escalations with China
Tensions rose recently between the U.S. and China days after there were reports that a “phase one” trade deal was nearing completion. Last week, a senior White House official told Politico that the U.S. was “millimeters away” from a phase-one trade agreement with China, a deal which might involve the removal of certain tariffs.
This good news was followed by President Trump signing two bills into law backing pro-democracy demonstrators in Hong Kong, a move which infuriated the Chinese regime. Hong Kong has been in the spotlight as protesters revolt against proposed extradition laws. China has openly blamed the U.S. for interfering with these matters, and the President’s endorsement of the protesters did not help to ease the situation. (2)
The Chinese Ministry of Foreign Affairs quickly reacted, stating that American lawmakers had “sinister intentions” and that China would take “strong counter-measures” in return. The President recently stated that a trade deal might be on hold until after the U.S. elections in 2020. Needless to say, the markets have reacted negatively since these matters unfolded, but we still remain near the all-time highs in the S&P 500 and Nasdaq.
In other China news, there were recent indications that the country’s economy had slowed for a seventh consecutive month, and China’s third-quarter GDP reading was its poorest in nearly 30 years. Through October, profits at Chinese industrial companies were down 9.9% year-over-year, a record annualized dip, and an index of business confidence hit a 14-month low. (4)
The U.S. had some positive economic news with retail sales rising 0.3% for the month of October, in addition to the National Retail Federation forecasting a year-over-year gain between 3.8% and 4.2% for the upcoming holiday season. If its prediction comes true, this holiday season could rank among the top of the decade. (5)
There was some mixed data from the real estate front. The pace of home buying accelerated during October with existing home sales advancing 1.9% in October, partly reversing a 2.5% September setback. However, new home sales declined 0.7%, which was a stark retreat when compared September’s healthy 4.5% gain. (6)
The Federal Reserve appears comfortable with its current monetary policy stance and is watching the business cycle and inflation data closely. For the time being, interest rates will likely remain unchanged as the probability of a rate increase for December is only 2.2%. If the current Fed trajectory stays its course, the impact on the overall market should be nominal this month.
The short-term economic outlook has shifted to some degree as anxieties about a recession arriving in 2020 have somewhat eased compared to earlier this year when the yield curve first inverted. Many analysts still point to the yield curve, as well as rising gold prices and the recent bond rally as early warning signals. In spite of these historical recession signals, the stock market has continued a slow grind upward.
Given all of these factors, as well as the rising China trade tensions, we remain cautiously optimistic until economic and market data coalesce back into more traditional correlations.
Monthly Financial Tip:
An emergency fund should be thought of as just that: a cash reserve for handling sudden and sizeable expenses. While it may be tempting to dip into it for other reasons, its definition and purpose must be respected.
1 - money.cnn.com/data/markets/sandp/ [11/29/19]
2 - politico.com/news/2019/11/27/us-trade-deal-china-074230 [11/27/19]
3 - cnbc.com/2019/11/29/dow-futures-black-friday-thanksgiving-holiday.html [11/29/19]
4 - yhoo.it/2rAraVQ [9/16/19]
5 - foxbusiness.com/markets/us-consumer-spending-up-0-3-in-october-but-incomes-are-flat [11/27/19]
6 - investing.com/economic-calendar [11/29/19]
7 - cmegroup.com/trading/interest-rates/countdown-to-fomc.html [12/04/19]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.