A long December and there’s reason to believe,
Maybe this year will be better than the last.
This song, by the Counting Crows, came to mind this week. Volatility returned in December after stocks basically went straight up in November. The month began with some built-in anxiety as investors remember what happened last year. After reaching new highs in the Fall of 2018, stocks experienced a miserable selloff into the holidays to end the year in the red. A repeat is unlikely, but the elevated levels in 2019 rightly bring concerns. Especially with so many problematic issues relating to trade, impeachment and terror. There’s also the issue of an economic slowdown, and recessionary pressures overseas. There’s no sign of recession in the US though. In fact, the US Economy continues to demonstrate it’s in solid shape. November’s job report proved that today.
266K jobs were created in November, far surpassing the 187K expected. The unemployment rate fell back to 3.5%, the lowest on record since 1969. That’s five decades of data. The November jobs growth was the best since January. While hopes were already high, much of that was based on the return of the General Motors workers following a lengthy strike. That dynamic indeed boosted employment in the car industry by 41K, part of an overall 54K gain in US manufacturing. That’s an industry that has been hurt by the trade wars. Health care added 45K positions after contributing just 12K in October. In addition to the strong November gains, September and October were revised higher. Those brought the 2019 monthly average to 180K, compared with 223K in 2018. For perspective, the US Economy needs to create about 107K jobs a month to keep the unemployment rate steady. The US Economy is clearly ahead of that curve. With the holidays ahead, it just might be strengthening. In some ways, from a Market perspective, this is as good as it gets.
Despite all of the trade tensions and tariffs, not to mention geopolitical issues, the US Economy continues to chug along just fine. This is the longest economic expansion in recorded American history, and it is clear it ain’t done yet. There were serious concerns of recessionary pressures which led to an inversion of the yield curve earlier in the year. Those have abated. It will be interesting to see how the President uses this renewed strength in negotiations with China. This could absolutely increase his resolve to play hardball with China which is clearly struggling more economically. China also has Hong Kong to contend with. The strong US Economy is a topic the Democratic Presidential candidates don’t want to discuss on the campaign trail, because it’s hard to compete against an incumbent with a strong economy at his or her back. Impeachment has clearly been their topic of choice. One important factor is whether this recent strength will encourage Corporate America to start spending again as the trade war tensions put a bit of a freeze on capital expenditures since Summer.
There are just 15 ½ trading days left in 2019. Seasonality tends to take hold with December historically the strongest Market month, led by a Santa Rally. It clearly didn’t happen last year. The setup is there – on the back of a strong economy. But there are some potential obstacles in the way. The Fed has a meeting next week. The Market is assigning a 99.3% probability of a rate cut. What the Fed says or doesn’t say is what the Market will be more focused on. Expectations keep shrinking for more interest rate cuts in 2020, and there is next to no chance of any rate hike coming on the horizon.
Selling has been quite muted. The losses to start the week were nearly erased by the rally heading into the weekend. It could very well be that investors are looking to wait to take gains in 2020 for the new tax year. Something else that caught our attention was the fact that both the Bond Market and Gold took this job report and subsequent stock rally very much in stride. They both declined in price, but not by that much. The Bond Market is not sending an all-clear sign whatsoever. The Stock Market is getting excited again. The S&P is back near all-time highs. There’s apparently no longer anything to worry about for investors… That’s the attitude on Wall Street. We still see plenty to be concerned about. But there is plenty to like too. It’s a marathon, not a sprint. It’s the final turn for 2019, but there is so much to account for ahead. We play the long game; it never ends. We prepare for anything that might come our way.
Tomorrow marks the 78th anniversary of the attacks on Pearl Harbor. December 7, 1941; A day that will live in infamy. Our sincere appreciation and respect go out to those who made and continue to make the ultimate sacrifice for our great nation.
Have a nice weekend. We’ll be back, dark and early on Monday.