Joel’s Weekly Talking Points – 1/21/20
- 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.
- 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.
- 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.
- 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.
- 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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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.
The Russell 1000 Value Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and lower forecasted growth values.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
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The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index’s three largest industries are materials, energy, and banks.
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