A pessimist sees the difficulty in every opportunity, an optimist sees the opportunity in every difficulty. – Winston Churchill
In a dramatic turnaround, the Dow Jones Industrial Average rallied 337 points on Friday and nearly erased a 370-point deficit from earlier in the week, closing lower by just 36 points or 0.1%. The S&P 500 Index and the Nasdaq Composite Index also ended near the flat line after rallying from steep losses caused by weak manufacturing data, continued trade uncertainty with China and new trade tensions with France. The White House is still planning on slapping additional tariffs on China on December 15th and President Trump even floated the idea of delaying a trade deal with China until after the 2020 presidential election. Stocks sold off on the news and the pain was compounded when the White House said it would impose duties of up to 100% on $2.4 billion of French imports in retaliation for a 3% tax that France imposed on revenues of U.S. technology companies. By Friday, though, the sentiment around trade changed when White House economic adviser Larry Kudlow commented that a trade deal with China was close but that conditions such as enforcement and other assurances had to be met first. Investors viewed this announcement as positive and they received additional good news on Friday in the form of a much better than expected jobs report. The government reported that 266,000 new jobs were created in November and that the unemployment rate dipped to 3.5% from 3.6%, matching the lowest level since 1969. The job numbers for October were also revised higher and average hourly earnings were better than forecast. Weekly jobless claims confirmed the strong jobs data as they fell by 10,000 to 203,000, which was the lowest level in seven months and well-below the estimate of 215,000. All of this employment data suggests that the labor market remains solid despite the slowing economy. It also indirectly benefits the U.S. in its trade war negotiations with China as it puts the U.S. in a much stronger bargaining position relative to the weaker Chinese economy.
Although the ISM Manufacturing Purchasing Manager’s Index (PMI) for November fell to 48 and was below expectations, the ISM non-manufacturing or services sector index was 54, solidly in expansion territory. This is significant as manufacturing accounts for a relatively small part of the U.S. economy compared to services. The U.S. trade deficit fell almost 8% to $47.2 billion in October, a nearly 2-year low.
For the week, the Dow Jones Industrial Average slipped 0.1% to close at 28,015 while the S&P 500 Index added 0.2% to close at 3,145. The Nasdaq Composite Index dropped 0.1% to close at 8,656.
Both the producer price index (PPI) and the consumer price index (CPI) in November are expected to rise modestly with a 1.2% year-over-year gain for the PPI and a 2% year-over-year gain for the CPI. Retail sales for November are anticipated to increase more than in October and be indicative of fairly strong consumer spending.
The Federal Open Market Committee (FOMC) meets to review its monetary policy and is expected to leave interest rates unchanged after cutting rates three times this year.
The most notable companies scheduled to report quarterly earnings this week include Toll Brothers, Adobe, Ciena, Oracle, Broadcom, Costco, Vera Bradley and American Eagle Outfitters.
After a surprisingly strong jobs report on Friday that saw 80,000 more jobs created than forecast, it’s likely that the Federal Reserve will not be cutting interest rates any time soon. The Fed has maintained that as long as the economy continues to show a moderate pace of growth and low inflation, there is no reason to change current monetary policy. Following the blowout jobs number, Treasury yields rose with the 2-year ending the week at 1.61% and the 10-year finishing at 1.84%. If the economy picks up steam and growth begins to accelerate, the yield on the 10-year Treasury could rise above 2.0% next year. Bond yields are already near historic lows and such an increase would result in a decline in bond prices. (Bond prices and yields move in opposite directions). The Barclays U.S. Aggregate Bond Index is a broad-based index that represents intermediate term investment grade bonds traded in the U.S. and it measures the performance of the bond market. It currently has a duration of about 6 years, meaning that a 1% rise in interest rates could result in about a 6% decline in the price of a bond. If the 10-year Treasury yield rose 40 basis points to 2.25%, the decline in the price of the bond would be about 2.5%, which would erase the current yield of the Barclays index. For this reason, it makes sense for investors to shorten the duration of their fixed income portfolios by including short-term bonds or bond funds with average maturities of 2 years or less, especially since the yield curve right now is relatively flat with only 23 basis points separating the yield of the 2-year Treasury and the 10-year Treasury.