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Investors Get More Certainty For the week of December 16, 2019

Key Market Data

12/06/2019 12/13/2019 One Week Change YTD One Year
S&P 500 Index 3,145.91 3,168.80 +0.73% +28.89% +22.00%
MSCI EAFE Index 1,981.63 2015.62 +1.72% +21.38% +17.85%
Barclays Capital U.S. Aggregate Bond Index 2,221.67 2,228.17 +0.29% +8.87% +10.00%
10-year Treasury Note Rate 1.838% 1.823% -1.5 basis points -86.2 basis points -109.1 basis points

At long last the U.S. and China agreed to a narrow deal that, for now, puts the trade war on ice. When news broke Thursday, stocks jumped higher but finished the week quietly as the details emerged and investors eyed next steps. Still, it’s a welcome bit of certainty on an issue that’s been a wild card for most of 2019. And, speaking of certainty, the general election in the U.K. last week resulted in a margin of victory that hadn’t been seen since Margaret Thatcher’s re-election in 1987. Now, the course forward on Brexit looks more certain than it has in years.

This week, we’re looking forward to digging into a fresh read of The Conference Board Leading Economic Index, and a flurry of housing data. Also, after a somewhat disappointing retail sales report, we’ll be looking for more color on consumer spending and sentiment as the week closes.

WALL STREET WRAP

China, U.S. seal a deal: Stocks rose sharply on Thursday morning after President Donald Trump tweeted “Getting VERY close to a BIG DEAL with China. They want it, and so do we!” Markets, perhaps accustomed to the Twitter tease, faded into the afternoon as a deal has been “close” several times before.

However, this time it was the real deal. And by Thursday afternoon stocks shot right back up after Bloomberg broke the story that trade negotiators had sent initial terms of a phase-one trade deal to President Trump for his approval. According to details reported Friday, both the U.S. and China agreed to put the trade war on hold, which included cancelling plans to impose fresh tariffs on Chinese goods Sunday. The U.S. also agreed to halve the tariff on roughly $120 billion in goods to 7.5 percent from 15 percent. China agreed to boost agricultural purchases by $32 billion over the next two years and made commitments to fix certain intellectual property sticking points. U.S. trade negotiators say the deal will nearly double exports to China over the years. The two sides expect to sign the deal in the first week of January.

Federal Reserve sets cruise control: Stocks barely budged Wednesday after the Federal Reserve, as expected, held its benchmark interest rate steady at its final meeting of 2019. Fed officials signaled they are comfortable with keeping policy on hold throughout 2020, as inflation remains low amidst a backdrop of moderate growth and a strong labor market. These conditions could persist for some time, as Fed officials lowered their projections for an unemployment rate that’s consistent with stable prices to a range of 3.9 to 4.3 percent from 4.4 percent to 4.7 percent. They don’t anticipate inflation exceeding its 2 percent benchmark until 2021, and officials expect unemployment to hold at 3.5 percent by the end of 2020.

With economic data lining up (prices rose modestly in November), and a presidential election in 2020, there’s a good chance Fed policy won’t be a prominent storyline for markets next year.

Boris Johnson and the Conservatives win Downing Street: U.K. Prime Minister Boris Johnson’s Conservative Party won 365 of 650 seats in the House of Commons, which is the biggest win since Margaret Thatcher’s 1987 resounding reelection. That means a conclusion to Brexit is likely near (we’ve heard that before), with Britain ultimately splitting from the EU by the end of January. “We will get Brexit done, on time, by the 31st of January, no ifs, no buts, no maybes,” Johnson said in a victory speech early Friday.

Small business swagger returns: Small business optimism recorded its highest month-over-month gain in over a year in November, a stark departure from October when talk of a possible recession dampened the outlook. In November, more owners said it’s a good time to expand as uncertainty falls and optimism about the near-term business climate improves. More owners reported positive profit trends and higher sales in November, while at the same time raising wages or at least planning to do so. That gels with additional data from the NFIB showing U.S. shoppers spent $19.6 billion at independent retailers and restaurants during Small Business Saturday this year, up from $17.8 billion the prior year, or a 10 percent increase.

A soft November for retailers: Shoppers in the U.S. tiptoed into the holiday spending season and held back a bit on spending. The Commerce Department said sales, excluding cars and gasoline, remained unchanged compared to October. Consumer spending (of which retail is 25 percent) is a big driver of economic growth, but November’s figures didn’t include Cyber Monday sales that bumped into December. Keep in mind, the holiday shopping season was trimmed by six days this year due to a late Thanksgiving holiday.

THE WEEK AHEAD

Housing market has momentum: This week, we’ll get another comprehensive look at the U.S. housing market, which has shown signs of strength recently. As we near the end of the year, recent data has shown builders are confident, mortgage rates remain historically low (the Fed’s rate cuts are trickling down), and new home sales are strong.

A look at leading economic indicators: We’ll also get a fresh Conference Board Leading Economic Index (LEI) reading. The LEI combines 10 measures of economic activity, such as the S&P 500, consumer confidence, building permits, unemployment levels and more, into a single number that compiles disparate pieces of the economic puzzle. Because there are so many indicators, LEI smooths the impact of short-term, temporary volatility in any single metric to provide a holistic view. The LEI has fallen three straight months but remains at a level that indicates modest growth. We’ll also get a fresh Conference Board Leading Economic Index (LEI) reading.

More feedback on consumers: This week we’ll have more data to round out the softer than expected retail figures. Reports for December consumer sentiment and consumer spending for November both come out Friday. These reports, along with the GDP revision, could be market-movers to close the week.