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Fed’s First Policy Update of 2020 Comes Amidst Coronavirus Concerns For the week of January 27, 2020

Key Market Data

01/17/2020 01/24/2020 One Week Change YTD One Year
S&P 500 Index 3,329.62 3,295.47 -1.03% +2.10% +27.23%
MSCI EAFE Index 2,057.74 2,044.92 -0.62% +0.44% +18.01%
Barclays Capital U.S. Aggregate Bond Index 2,236.24 2,253.90 +0.79% +1.30% +9.66%
10-year Treasury Note Rate 1.822% 1.685% -13.7 basis points -23.4 basis points -103.2 basis points

With trade deals inked and a comfortable Federal Reserve, we expected much of the noise that enveloped the market in 2019 would fade and allow economic fundamentals to steal the mic. We still believe that’s the case for 2020, but that doesn’t mean it’s entirely quiet on the markets front.

Earlier this month, for example, markets were jolted by U.S. and Iranian airstrikes. Nerves calmed quickly and stocks continued climbing. Now, the coronavirus outbreak in China has become the latest cymbal crash to startle investors. But beneath the din, a fundamentally sound economy continues to hum along — just look at the U.S. housing market. The coronavirus will no doubt capture headlines, but when you filter out the noise, investing success will continue to hinge upon maintaining a long-term outlook while letting diversification and strategic asset allocation serve as shock absorbers over any terrain.

This week, the Federal Reserve will conduct its first policy meeting of the new decade, we’ll get key data on spending and consumer prices; and fourth-quarter GDP will likely be a trending topic come Thursday.

WALL STREET WRAP

Investors Monitoring Coronavirus Outbreak: Markets wobbled this week as the world keeps a close eye on the Chinese city of Wuhan, which is the epicenter of a new coronavirus outbreak. Health officials over the weekend expanded a travel lockdown to include 50 million people to contain an outbreak that could persist for months. As of Sunday night, the virus had claimed at least 80 lives with more than 2,700 confirmed cases reported in China. Here in the U.S., five cases had been confirmed with slightly more than 100 other possible infections under investigation.

Stocks of vaccine makers rose. Meanwhile, travel-related stocks and oil dropped as investors worried coronavirus may impact growth. If history is any guide, markets could be volatile in the short term as news about infection rates continues to flow. A 2003 SARS outbreak and, more recently, the 2014 Ebola outbreak yielded a turbulent, yet temporary, patch that markets promptly recovered from. In other words, stay focused on the long-term while markets sort out the developing coronavirus situation.

Mortgage Lenders Celebrate a Big Year: According to industry trade publication Inside Mortgage Finance, lenders inked $2.4 trillion in home loans in 2019, which is the most since 2006 and a 46 percent increase over 2018. The Federal Reserve’s trio of interest rate cuts in 2019 fueled a refinancing boom and pushed homebuyers into the market. Existing home sales in December rose 3.6 percent from November, up 10.8 percent year over year. Demand is surging, pushing the supply of homes for sale down 8.5 percent annually, which is the lowest level since 1982.

Positive economic spillover from a strong housing market is twofold. First, with unemployment low and wages rising modestly, people are feeling more confident about making what’s typically the biggest purchase of their lives. That’s good for banks, home builders and more (the housing market and related business is roughly 15 percent of GDP). But there’s another benefit: As more Americans refinance their mortgages to capture lower rates, they’re reducing a large, monthly expense that could free up funds to tackle debts, save, invest or spend.

Glimmers of Strength in Europe: A wave of global IHS Markit Purchasing Manager’s Index flash data reports released Friday showed signs that economies overseas are building strength. In the U.K., January reads came in ahead of forecast with the composite PMI hitting 52.4 (anything above 50 indicates expansion), with manufacturing and services both exceeding analyst expectations. The German Composite PMI rose to 51.1 from 50.2 the previous month, the highest reading in 5 months. The German ZEW Economic Sentiment Survey rose to its highest level in more than 4 years, as cooling trade tensions have boosted people’s outlook of the next six months.

The broader Eurozone PMI held steady at 50.9, with manufacturer sentiment rising as orders show signs of stabilization. All in all, the data points to a more constructive outlook for 2020 in Europe.

Here in the U.S., the composite flash PMI hit 53.1, exceeding a consensus estimate of 52.3.

THE WEEK AHEAD

The Fed’s First 2020 Policy Meeting: For the first time this decade, the Federal Reserve will meet and announce its latest monetary policy decision on Wednesday. After quite an active 2019, we believe that you shouldn’t expect much policy action from the Fed in 2020. For one, the Fed would like to stay quiet during a presidential election year. Fed Chairman Jerome Powell has also said that he feels policy is in a good place right now and doesn’t expect to act unless the data build a compelling case to do so. If anything, pay attention to Powell’s thoughts on inflation and how he frames that discussion. If there’s one underlying theme for the Fed in 2020, it’ll be shaping market expectations for higher inflation to hit the Fed’s desired benchmark of 2 percent.

Speaking of Inflation: On Friday, we’ll see how much the prices consumers pay for goods moved in December. In November inflation moved slightly higher, up 0.1 percent. While CPI looks backwards, employment cost, personal income and spending data (also coming out Friday) could offer some clues as to whether the Fed will near that inflation target moving forward.

Will Growth Slow a Bit in the Fourth Quarter? The fourth-quarter GDP reading will be released Thursday, and that’s one indicator that tends to get a lot of attention. The latest forecast, according to GDPNow, calls for a modest growth rate of 1.8 percent, below the third quarter’s 2.1 percent annual growth rate. That aligns with the unofficial data from Yelp, the California-based business directory company, which also predicts a slower growth rate for the fourth quarter. The so-called Yelp Economic Average is billed as a benchmark of economic strength, based on crowd-sourced data from millions of businesses and users. Yelp says its index is a local, rather than national, measure of economic strength.

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.