Last week there was no clear driver for the stock market but, the Dow Jones Industrial Average gained more than 3 percent, while the Nasdaq Composite and Standard & Poor’s (S&P) 500 Index moved higher by about 2.5 percent. It was a puzzler. Ben Levisohn of Barron’s explained:
“Given those gains, we’d expect a heaping helping of good news, but not much was forthcoming. Earnings reports from [two large multinational companies] left investors wanting. And economic data were either bad or terrible in the United States – industrial production declined in January, the first drop in eight months, while December’s retail sales fell the most for any month since 2009. But who needs good news when the United States and China are reportedly making progress on trade talks? Yes, the details remain a little fuzzy, but at least the tone is more constructive.”
It probably wasn’t just optimism about China that pushed markets higher. Consumer Sentiment, which gauges Americans expectations for the economy, was up more than 4 percent month-to-month. One driver of consumer optimism was relief the government shutdown had ended. Another driver is a change in inflation expectations, which are at the lowest level seen in half a century. Americans think inflation will remain low and they anticipate wages will rise. The Federal Reserve’s newly accommodative attitude hasn’t hurt, either.
Investor sentiment was leaning bullish last week, too. Willie Delwiche of See It Market reported the Investor Intelligence survey of financial advisors showed 49 percent bullish and 21 percent bearish. The AAII Investor Sentiment Survey reported bulls (40 percent) edged bears (37 percent) by a neck. Those indicators were balanced by the Daily Trading Sentiment Composite from Ned Davis Research which suggested optimism was too high.
When markets rise, as they have during the past few weeks, it may be tempting to take a more aggressive stance and tilt your portfolio toward U.S. stocks. This may not be a good idea. If you have any questions about your portfolio, give us a call.
THIS WEEK IN THE MARKETS
Earnings season is wrapping up. Nearly 80 percent of S&P 500 companies have reported results. Growth expectations remain around 13 percent. Amazon announced it is cancelling development of an additional headquarters in New York based on local opposition to the significant tax incentives offered to the company.
U.S. negotiators finished a round of negotiations in Beijing last week, and talks will continue this week in Washington. Negotiators are making progress, but there have been few announcements on the most challenging issues.
When evaluating December’s retail sales data, keep in mind investment markets focus on the future, but they do so imperfectly. Retail sales for December sank 1.2 percent, as shown in the accompanying chart. U.S. retail sales are important because U.S. consumers have been a key source of global economic strength and weakening consumer demand would put additional pressure on global economies. The S&P 500 declined very slightly after the data was released Thursday morning, but it rallied sharply on Friday to extend the weekly gains.
Expectations were for a 0.1 percent increase, so the miss was sizable. A deeper look at the data shows sales slowed broadly. When stripping out the more volatile parts of retail sales, the data looks even worse. Excluding automobiles and gasoline, sales declined 1.4 percent compared to expectations for a 0.4 percent increase. It wasn’t just physical stores that struggled. Online sales grew less than 5 percent in December, after growing around 10 percent in recent years.
Why were retail sales so weak, and why did markets move higher anyway? There are a few potential explanations. First, retail sales data is often revised, and investors may expect the results to improve. Second, some observers have seen a stronger link between the stock market and retail sales. Instead of reacting to the retail sales data, the fourth quarter market decline may have caused consumers to spend less. The government shutdown may also have contributed. Following that logic, the recent market recovery and deal to fund the government should push retail sales higher in coming months. Third, other news, such as optimism about a trade deal, may have trumped the retail sales data and pushed markets higher.
A more pessimistic explanation is that investors’ concerns about risk have faded with the recent market rally and the hope of a trade deal has captured their imaginations. Our thoughts are somewhat in the middle. The potential explanations above carry some validity, but we believe the muted reaction to the data is an indication that the stock market is still recovering from the December sell off. We anticipate volatility over the next few months.
Key points for the week
- U.S. retail sales dropped in December and missed expectations. However, we expect sales to rebound in the coming months.
- U.S.-Chinese trade negotiators made progress in Beijing, but difficult issues remain.
- Global stock markets rallied sharply last week as investors focused on trade progress and the averted government shutdown rather than weak retail data.
What are we READING?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
Some economists now suggest that the U.S. Government no longer needs to worry about debt or deficits. The Congressional Budget Office is projecting $1 trillion deficits starting in 2022. Borrowing costs are still close to historical lows, which may suggest that bond investors are not worried about the amount of debt or bonds issued or will be issued in the future. Some economists are also now proposing a new type of fiscal policy called Modern Monetary Theory (MMT). This theory is different in that its only constraint is inflation. In periods of low inflation, theoretically the government can print its own currency to finance the deficits and repay the bond investors.
Ludivine, a two-and-a-half-year-old Bloodhound in Alabama, was let out of her home to go to the bathroom recently, but she had other plans in mind. Ludivine ran a half-marathon and finished seventh, even after stopping at the two-mile point to sniff a dead rabbit. Her owner, April Hamline, couldn’t believe she ran the whole half-marathon because “she is actually really lazy.” This begs the question, “How do you put a 13.1 sticker on a dog?”
WHAT’S IN YOUR WALLET
You’re at the checkout. How do you pay for your purchase? Do you reach for a credit card, debit card, cash, check, or some form of electronic payment, such as a mobile wallet or wearable?
The Federal Reserve Bank of San Francisco’s 2018 Findings from the Diary of Consumer Payment Choice (DCPC) found participants preferred to pay using debit cards. The order of payment preference was like this:
Here’s an interesting side note. The more money a household earned, the more likely they were to pay by credit card.
$25,000 – 49,999
$50,000 – 74,999
$75,000 – 99,999
$100,000 – 124,999
$125,000 or more
The shift in preference begs the question: Do wealthier people have more debt? Some do, but wealthier households are more likely to pay off credit card debt each month, according to author Tom Corley who was cited by Credit.com writer Gerri Detweiler.
If you use credit cards frequently and haven’t been paying down your balance each month, it may be a good idea to do a simple calculation to determine how much you are paying in interest each year. Just multiply the interest rate you pay by the amount of debt you carry. The amount may surprise you. Nerdwallet’sAmerican Household Credit Card Debt Study reported, “Households with revolving credit card debt will pay an average of $1,141 in interest this year.”
If retirement is 10 years in the future, saving $1,141 a year, and earning 6 percent annually on the money, could provide about $16,000 in additional savings. If retirement is 30 years away, you could increase your savings by about $96,000*. It’s food for thought.
*This is a hypothetical example and is not representative of any specific investment. Your results may vary.
“Wealth consists not in having great possessions, but in having few wants.”
~ Epictetus, Greek philosopher
"Whether or not we realize it each of us has within us the ability to set some kind of example for people. Knowing this, would you rather be the one known for being the one who encouraged others, or the one who inadvertently discouraged those around you?"
~ Josh Hinds, Syndicated Columnist and Author
“You can achieve anything you want in life if you have the courage to dream it, the intelligence to make a realistic plan, and the will to see that plan through to the end."
~ Sidney A. Friedman, Speaker and Author
Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and is subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Keep in mind that there is no assurance that any strategy, including diversification and asset allocation, will ultimately be successful or profitable nor protect against a loss. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal. Please note direct investment in any index is not possible.
The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Investing in emerging markets can be riskier than investing in well-established foreign markets.
The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
The Barclays Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investors Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices.
Links are being provided for information purposes only. RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members.
RJ Approval # 2429284