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Trade Deal Double-Shot Boosts Markets For the week of January 21, 2020

Key Market Data

01/10/2020 01/17/2020 One Week Change YTD One Year
S&P 500 Index 3,265.35 3,329.62 +1.97% +3.14% +28.85%
MSCI EAFE Index 2,040.49 2,057.74 +0.85% +1.06% +19.60%
Barclays Capital U.S. Aggregate Bond Index 2,234.99 2,236.24 +0.06% +0.50% +9.19%
10-year Treasury Note Rate 1.821% 1.822% +0.1 basis points -9.7 basis points -92.9 basis points

For most of 2019, the word “trade” in a headline generally meant new tariffs (or threats of tariffs) had been announced, either from the U.S. or China. But 2020 has followed a different script and trade developments, thus far, have been sweeter than sour. Last week, markets soaked up two rounds of good news on the trade front, which helped push stocks to new record highs. But there were more reasons for optimism: Retail sales came in strong, the housing market is sitting on a firm foundation and consumer sentiment remains elevated.

This week will be rather light, given the holiday, but there are a few important reports we’re digging into. The Conference Board Leading Economic Index (LEI) comes out Wednesday — that’s a nice, broad look at the health of the economy. Key data from European economies and the Federal Reserve are also on tap to round out the week.

WALL STREET WRAP

A Trade Deal Double-Shot: Markets welcomed a little more certainty on trade issues this past week. On Wednesday, President Donald Trump signed a phase-one trade deal with China, a move that significantly ratchets down a major geopolitical uncertainty that loomed over markets for more than a year. As part of the broader deal, China pledged to purchase an additional $200 billion in American goods by 2021 and work to stamp out theft of U.S. intellectual property. While enforcement mechanisms in the deal aren’t clear (and it remains to be seen how China will interpret its end of the bargain), the Trump administration hailed it as a historic first step between the world’s largest economies.

Then, on Thursday, the U.S. Senate overwhelmingly approved the USMCA trade agreement on an 89-10 vote. The deal is an overhaul of trade rules between the U.S., Canada and Mexico, and, importantly, assures tariff-free trade will continue between the three nations.

All told, this week significantly turned down the volume on trade noise, which could allow fundamental, macroeconomic data to take the mic for the time being.

China’s Growth Slows, But Reasons for Optimism: With a trade truce inked, leaders in China can now set their sights on another item on their agenda: spurring growth. On Friday, Chinese officials said the economy grew 6.1 percent in 2019, which is the lowest read in nearly 30 years. Trade tensions hurt business confidence throughout the year, but the economy is also digesting high levels of debt (which helped spur high growth rates in prior years). As tensions with the U.S. ease, the Chinese are looking for consumer confidence and spending to rebound and help provide a boost this year. And the data support reasons for optimism: Chinese leading economic indicators are inching back up (retail and industrial production improved), and the economy showed signs of strengthening in the end of 2019. It looks like stimulus is flowing through the economy, and this could be a tailwind for global growth in 2020.

Consumers Close 2019 on Firm Footing: Amidst last year’s trade battles, the U.S. consumer remained a source of strength that helped push the economy through some rough patches. And, according to December’s advance retail figures, consumers finished the year strong. Retail sales for December were up 5.8 percent compared to December 2018, and up 0.3 percent from November. All in all, it was a healthy holiday shopping season, despite fears over the short length due to a late Thanksgiving holiday. Total sales for the year grew 3.6 percent on the heels of a strong 2018 in which sales grew 5 percent. Weekly jobless claims also came in lower than expected Thursday. Unemployment remains at multi-decade lows and sentiment remained elevated in January — all good signs for consumer health moving into 2020.

Another quick take: Data also show consumers continue to funnel more purchasing dollars online. Total sales for department stores, for example, fell 5.5 percent from 2018 to 2019, while non-store retailers (which includes online sellers, such as Amazon) rose 13.1 percent.

Homebuilders Keep Building Momentum: Homebuilding activity in the U.S. was again robust last month. New housing starts pushed up nearly 17 percent in December to 1.61 million units, a level not seen since 2006. On a year-over-year basis, new housing starts were up 40 percent in December (and 3.2 percent for the entire year compared to 2018). It’s no wonder that homebuilder confidence posted its highest back-to-back readings since 1999 in December and January. As of 2018, spending within the housing market accounted for $3.4 trillion, or roughly 15 percent of GDP. Strength in the housing market, therefore, is a key component of steady economic growth and consumer strength.

THE WEEK AHEAD

Where’s the Ship Headed? The Conference Board Leading Economic Index (LEI), in a sense, serves as the speedometer on the economic dashboard. Each week, we look at key data as it comes out in individual reports, and you can think of these as the handful of other gauges you’d find on the dashboard, such as engine temp and oil pressure. But the LEI puts them all together to give a sense of the speed and direction of the economy, and like a speedometer, it’s one we like to watch closely.

Key Data Coming from Global Economies: This week we’ll get reads on industrial and manufacturing activity from the Eurozone, Germany and Japan, as well as flash reads from the U.S. While the U.S. has seen the manufacturing sector slow for several months, the decline in activity abroad is more pronounced, especially in Germany.

Inflation on Trend? The Chicago Fed National Activity Index (CFNAI) comes out Wednesday and serves as a broad look at whether growth is accelerating higher than historical trend. However, it’s also a useful predictor for predicting inflation. While we’ve seen anecdotal reports of businesses raising wages (or their intention to), the CFNAI could help us see if there’s a bigger trend building.

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.