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Stocks Slip and Trade Deal Will Likely Slide Into New Year For the week of November 25, 2019

Key Market Data

11/15/2019 11/22/2019 One Week Change YTD One Year
S&P 500 Index 3,120.46 3,110.29 -0.33% +26.33% +19.77%
MSCI EAFE Index 1,976.69 1,964.84 -0.60% +18.27% +13.43%
Barclays Capital U.S. Aggregate Bond Index 2,216.74 2,223.16 +0.29% +8.63% +10.81%
10-year Treasury Note Rate 1.832% 1.771% -6.1 basis points -91.4 basis points -129.3 basis points

It wouldn’t be a market wrap without a little news on trade. And this week, after gaining some positive momentum, the trade narrative took a step backward as news broke Wednesday that it was unlikely a “phase-one” deal would be signed in 2019. Stocks dipped following the news and remained muted through the rest of the week. On the positive side, data from the housing sector showed signs that the Federal Reserve’s rate cuts are perhaps filtering through the broader economy. And, in the final earnings report before the holiday shopping season, retailers reported mixed results — but that’s not necessarily a sign of consumer weakness.

This week, we’ll get another read on consumer confidence and spending, which are important metrics as consumers have driven growth while other sectors of the economy have slowed. The Fed will also release some deeper data about the overall economy this week.

WALL STREET WRAP

Trade talks stall, deal could slide into 2020: News broke on Wednesday that completion of a “phase-one” trade deal between the United States and China could drift into 2020, at least according to trade experts and sources close to the White House. China wants to see broader rollbacks of tariffs, while President Trump wants to address intellectual property issues and push China to purchase more agricultural products. Trump, while touring an Apple manufacturing plant in Texas, was asked why he hasn’t inked a deal yet. “I haven’t wanted to do it yet because I don’t think they’re stepping up to the level I want,” he replied. Stocks hit an air-pocket and fell sharply Wednesday around lunchtime as headlines filtered across major news outlets, but they pared losses before the close. By week’s end, both President Trump and Chinese President Xi Jinping signaled their mutual desire to work out a trade pact.

The next key date to watch will be Dec. 15 when new tariffs on $156 billion in Chinese goods are due to take effect. Further complicating the trade calculus: Congress passed a bill with veto-proof majorities that forces the U.S. government to back Hong Kong protesters, and sanction officials who are responsible for human rights abuses in the territory. China denounced the bill, saying it interferes with the country’s internal affairs.

Home builders upbeat: We’re seeing signs that the Federal Reserve’s easing is starting to trickle through the broader economy, given positive housing data last week. Homebuilding bounced back in October and permits for future construction exceeded a 12-year high. Housing starts also jumped 3.8 percent (8.5 percent year over year), with single-family construction rising for the fifth month in a row. These factors pushed builder confidence higher. Collectively, these are all signs of strength in the housing market and could be driven by lower mortgage rates, which are tied to the key interest rate that the Fed cut three times this year.

Growth in the number of available houses should be positive for buyers who have stayed on the sidelines due to the lack of options in the market.

Mixed signals from retailers: Retailers last week posted a mixed bag of earnings results, but that may not be indicative of overall consumer health. Instead, the gap widens between retailers that are adapting to rapid shifts in the industry and those that aren’t. Case in point: Kohl’s earnings were lower than expected and the retailer reduced its profit guidance, while Target handily exceeded earnings expectations and raised its profit outlook for the year. In other words, the consumer is strong, but their spending behaviors are shifting.

Target CEO Brian Cornell summed up the lay of the land for retail saying, “If we turn to the overall retail environment, we’re seeing a very consistent and healthy environment across the U.S.,” he said. “I think what we’re seeing right now is the bifurcation of winners and losers, and I think our performance now speaks for itself.”

“The consumer is alive and well,” said Richard McPhail, chief financial officer at Home Depot, which reported a 3.5 percent rise in sales for recent quarter.

Business activity perks up: The IHS Markit Manufacturing Purchasing Managers’ Index rose to 52.2 in November, up from 51.3 in October (anything above 50 indicates expansion), which is the sharpest acceleration since April. It’s a sign that, as trade fears fade a bit, the economy looks to emerge from a rough patch that persisted for much of 2019. The data aligns with our expectations that, as 2019 ends and uncertainty diminishes, investors will once again focus on the fundamentals underlying the economy rather than headline fears. We believe there’s time left in the current economic cycle, and that growth will likely accelerate as we push into 2020.

THE WEEK AHEAD

Another consumer health check-up: This week, we’ll be digging into data about consumer confidence, income and spending. As we’ve said before, U.S. consumers are taking center stage right now as they have been picking up the slack for other parts of the economy that are slowing down due to trade uncertainties. Fortunately, consumers have continued to spend while fortifying their balance sheets and keeping debt manageable. We expect they’ll continue to be a bright spot as data comes out this week.

Any recovery in durable goods? Orders for durable goods (those big-ticket items such as appliances, electronics and medical equipment) declined 1.1 percent in September, which at the time was the largest decline since May. Manufacturers have struggled this year, contending with a global slowdown and tariffs. This week, good news on this front could provide a lift for markets as optimism has been muted for the manufacturing sector this year.

Deeper insights from the Fed: This week we’ll also get the Chicago Fed’s national activity index and the Beige book, which are both broader looks at the economy and inflationary pressures. We’ll be looking for any interesting, real-world anecdotes from Fed officials about the state of business in the U.S.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.