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Market Commentary

Stocks push to record highs
in strong November

December 2019


Fueled by an accommodative FOMC meeting in October, which saw the Fed cut interest rates for the third and likely final time this year as well as renewed hopes of a “phase one” US-China trade deal, US stocks posted strong gains in November reaching record highs. Recession fears, which had troubled the markets in August, eased as well, as business sentiment and manufacturing activity showed signs of improvement including Q3 GDP estimates edging higher. The labor market remained strong, as US payrolls added 128,000 jobs in October, exceeding expectations and while unemployment ticked higher it remained near 50-year lows.

US corporate earnings have been a concern for most of the year, yet Q3 earnings have been largely better than expected albeit benefiting from lowered estimates. Nonetheless, about 80% of S&P 500 companies beat estimates, according to JP Morgan.

The tech-heavy Nasdaq led the US markets in November gaining 4.5% to end the month +30.6% for the year. Gains were solid across the board, including a surge in small-caps with the Russell 2000 up 4.0% and the Dow closing over 28,000 for the first time ever and setting a record high, while posting a gain of 3.7% for the month. Meanwhile, the S&P 500 also set record highs in November, thanks to a gain of 3.4%. Though lagging slightly, the mid-cap S&P 400 added 2.0% as each of the major US indexes finished November with 20%+ gains for the year.

While sentiment is mixed, economic concerns eased overseas as well in November and Christine Lagarde took over as the European Central Bank president. Despite the new Brexit deal reached in late October, the EU Brexit extension still looms, which ends January 31, 2020.  The benchmark MSCI EAFE index gained 1% in November, while emerging markets dipped 0.2%. As with the US, foreign markets have been pushed and pulled with the US-China trade war narrative.

Following the third rate cut this year in October, the Fed’s statement and subsequent messaging indicated that it will be on “pause” for the rest of the year and likely well into Q1 2020. Coupled with a Treasury Bill purchase program, the yield curve un-inverted in late October and remained mostly positive for November with some of the best spreads of the year, despite interest rates edging higher for the month.  


Market QuickTakes... 

  • The Dow, S&P 500 and Nasdaq each set record all-time highs in late November
  • Positive US-China trade news, Fed’s third rate cut in October and ease of recession concerns spurred the gains
  • Tech-heavy Nasdaq surged 4.5% in November and led US indexes
  • Developed foreign markets edged 1% higher in November but emerging markets slipped
  • Interest rates rose slightly in November as market sentiment improved and economic concerns eased
  • The yield curve remained positively sloped for November, which is encouraging

 

December Update 

While notably the best month of the year for stocks from a historical perspective* (CFRA), since 1945, this December stumbled out of the gates as US-China trade hopes dimmed and the impeachment hearings began. Including the last day of November, stocks pulled back sharply the first two days of December as well. However, that dip was short-lived as a blowout jobs number on Friday sparked a 337-point rally, or 1.2%, in the Dow erasing the losses for the week. It was the best single day gain for the Dow since Oct 4, according to CNBC. 266,000 new jobs were added to the US economy in November, according the Labor department, much higher than expectations. The unemployment rate fell back to 3.5%, matching its 50-year low. The S&P 500 gained 0.9% and Nasdaq surged 1%. The strong gains pulled the major US indexes back up to 20%+ YTD, ending 12-6-19.

*Past performance no guarantee for future results

 

The Outlook 

US-China trade developments continue to be the main concern for the markets. At the NATO meeting earlier this week, President Trump said that the trade war could extend past the 2020 election and that he may extend the trade war to NATO members that are “delinquent” in spending on the mutual defense alliance. However, the “phase one’ discussions remain ongoing as the December 15th tariff deadline on $156 billion of Chinese imports fast approaches and markets will be closely monitoring the developments. 

Here are our year-end thoughts and Early 2020 Outlook:

  • Even if we see a pullback in December, 2019 looks to finish with strong equity and bond gains for the year
  • US-China trade negotiations remain the top upside and downside risk factor
  • 2020 recession fears have subsided and modest 2.0%+ US economic growth resumes given record low unemployment, strong consumer and low interest rates
  • Fed “pause” points to extended low interest rates with flexibility to raise or lower depending on data 
  • Global economic growth stabilizing but risks still to downside
  • Political risk climate to escalate with impeachment proceedings in the House and 2020 election
  • Volatility likely to increase going forward
  • Important for investors to lower stock and bond return expectations for 2020 and beyond given strong 2019 and rich valuations

As the Holiday Season approaches, we wish you and your family peace, health and happiness. We are thankful for your continued confidence as we look forward to the New Year.


~Your Nelson Securities Team 


RMD ReminderDon’t delay, 2019 Required Minimum Distributions must be withdrawn by December 31. Make arrangements with your Nelson Advisor early to avoid costly penalties.