Joel’s Weekly Talking Points – 1/21/20

1. Trade: Last week, the US and China signed the “Phase 1” part of their trade deal.  Aside from just making general progress to a larger and in my opinion more important deal (technology and intellectual property protections are not part of Phase 1), there are a couple important implications of this deal.  First, China agreed to buy an addition $200 billion worth of American goods and services over the next two years. Secondly, this deal somewhat lifts the cloud of uncertainly for Emerging Markets – a sector we like and generally recommend an overweight to in 2020.
2. CPI/PPI: The Consumer Price Index (CPI) and Producer Price Index (PPI) both rose in December 0.2% and 0.1% respectively.  CPI ended the year up 2.3% and PPI is up 1.3% for 2020.  Both numbers are in-line with published FED expectations but bear watching – if we see sudden spikes in wage growth (we didn’t in December) this may feed into CPI numbers which may make the FED reconsider its position on no rate hikes in 2020.
3. Retail Sales: Retail sales in December rose 0.3% for the month and were up 5.8% from a year ago.  The US consumer appears to be healthy, which is critical for domestic growth.
4. Housing Starts: This number hit its highest level since 2006 according to First Trust, with starts increasing 16.9% in December. JP Morgan has shown a chart for years showing a lot of excess building leading up to the 2008 crisis, and then a significant lag in building following.  We are finally getting back to a “normal” growth rate in my opinion and this also bodes well for 2020.
5. Fun fact of the week: CHANGE IN THE LAW – The newly passed SECURE Act allows Americans to withdraw money from a pre-tax 401(k) or IRA without paying a 10% penalty for an “early withdrawal” if the funds are used to cover costs related to childbirth or adoption. The withdrawal would be subject to ordinary income tax. Please consult a tax expert for details (source: SECURE Act).

Weekly index performance: The S&P was up 1.99% last week, the Russell 1000 Growth index was up 2.30% and the Russell 1000 Value was up 1.67%. Small caps also up with the Russell 2000 gaining 2.54%. International markets were mixed up EAFE gaining 0.86%, and Emerging markets up 1.17%. Turning to fixed income, the broad market US Aggregate was up 0.06%, and the High Yield index was up 0.27% last week.  The US 10 year is at 1.77% this morning.

Bottom line:  I wrote about this over the Summer and right now I am feeling a little like Joel-a-domus here, but markets are rallying to start the year: the S&P 500 is up 3.14%, the NASDAQ is up 4.67%, and Emerging Markets are up 2.91% – to start the year!  This is looking an awful like 1999 in my opinion – global Central Banks are “easy” and earnings growth is tepid, but still growing.  Earnings season will take on far more importance now, as P/E’s begin to grow – we need the “E” part to grow here, otherwise an asset bubble may form.  While that will feel great for a year, we all know how that story will eventually end.

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