Joel’s Weekly Talking Points – 1/23/20

1. Geopolitics: The US-Iran standoff seems to have dissipated to the point that markets are ready to move on. I do not believe we have heard and seen the last of this Iranian-based volatility but it’s something that markets have dealt with since the 1979 Islamic revolution and will likely continue to do so.
2. ISM: The ISM Non-Manufacturing Index came in at 55.0 for December, signaling continued expansion in that space (Levels above 50 signal expansion; levels below 50 signal contraction.)  This beat consensus which was 54.5.  Interestingly the Manufacturing ISM is still in contraction (below 50) and has been for some time.
3. Unemployment: The unemployment rate held steady at 3.5% in December.  This is a number worth watching in an election year.  As I noted in the quarterly commentary, if this rate creeps up in an election year that’s generally not good for the incumbent.
4. FED: Much has been written about the FED intervention in the repo market. To recap, the FED started injecting liquidity into the repo market back in September.  This market is essentially the overnight loan market for large banks.  While I could write a 20-page paper on what that is and the theories around it happening, investment houses are starting to call it “QE” (quantitative easing).  Interestingly, on a recent conference call a fixed income manager with John Hancock stated that the total FED action since September essentially amounted to another 50 basis points in rate cuts.
5. Fun fact of the week: MISSING THE BEST: The total return for the S&P 500 over the last 10 years (2010-2019) was a gain of +13.6% per year (total return). If you missed the 10 best percentage gain days over the last 10 years (i.e., 10 days in total, not10 days per year), the +13.6% annual gain falls to a +9.2% annual gain (source: BTN Research).

Weekly index performance: The S&P was up 0.98% last week, the Russell 1000 Growth index was up 1.86% and the Russell 1000 Value was up 0.07%. Small caps were down slightly with the Russell 2000 off 0.18%. International markets were mixed with the EAFE off 0.08%, and Emerging markets up 0.88%. Turning to fixed income, the broad market US Aggregate was down 0.09%, and the High Yield index was up 0.23% last week.  The US 10 year is at 1.80% this morning.

Bottom line:  So far so good for markets entering 2020.  We have seen our first major test (Iran) and the markets, for now at least, have pressed on.  Earnings season begins in earnest over the next two weeks so we’ll get to see how the holiday season treated retailers – in my opinion those numbers should look good.  Given low unemployment and accommodative central banks all signs are pointing positive – which makes me nervous.  We are keeping an eye on this repo issue I mentioned above but so far everyone I have talked to, from multiple investment houses seem to think it’s a non-issue – that also makes me a bit nervous.  Stay tuned…

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