The last week’s market highlights:
Quote of the week:
“I’d rather be lucky than good.” – Lefty Gomez
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2020 Outlook :
- U.S. economy: No recession in sight.
- Global economy: A clearer path for growth.
- Policy watch: Fed looking to stand pat as Brexit and trade risks abate.
- Fixed income: Low yields, tight spreads.
- Equities: Cyclicals and eurozone stocks set to lead.
- Asset allocation: No big bets with valuations rich in most spots.
An unexciting jobs report—and we’re OK with that
Heading into 2020, one of our major concerns was the potential for one or more market “tantrums.” These occurrences are especially worrisome because they often drive stock and bond prices sharply lower—albeit for a short time only—effectively leaving investors with few places to hide. In 2013, for example, worries that the Federal Reserve would scale back its monthly bond purchases sparked the now-famous “taper tantrum.”
Are markets likely to experience a similar shock? Only if we see evidence that the U.S. labor market has tightened to such an extent that wages have begun to meaningfully and steadily accelerate, thereby pushing up inflation and forcing the Fed to hike interest rates.
Based on December’s employment data, released on January 10, there’s no need to fret just yet. Here are some “good-but-not-too-good” highlights from the December report that suggest the U.S. job creation engine remains in good working order, yet isn’t running so hot as to grab the Fed’s attention:
- The economy added 145,000 payrolls, below yet within range of 2019’s monthly average of 176,000.
- The unemployment rate held steady at 3.5%, while the U-6 underemployment rate ticked down to 6.7%.
- Labor force participation edged up for prime-age workers (ages 25 to 54), to 82.9%.6
Just as Fed Chair Jerome Powell and his colleagues are unlikely to raise rates based on this payroll data, we doubt they’ll be moved to cut them in response to last month’s disappointing (but not disastrous) wage growth. Average hourly earnings increased just 0.1% in December and 2.9% for 2019 as a whole—the lowest year-over-year change since September 2018. Wage gains in manufacturing were especially weak, and we’re not confident that pay raises in that challenged sector are forthcoming. (According to the ISM, manufacturing activity contracted in December, plumbing a 10-year low.)
U.S. equities were unimpressed by the overall report. The S&P 500 Index ended Friday with a modest loss. For the full week, though, the index rose 0.9% en route to hitting a new record high, as markets expressed relief at the apparent de-escalation of hostilities between the U.S. and Iran.
What happens after the gold rush?
Gold bugs are out in force. Last week, the precious metal reached just over $1,574/ounce—near a seven-year high—and last year it rose 18%, its best one-year performance since 2010.7 Long perceived as a safe-haven asset, gold has historically rallied when geopolitical or financial uncertainty has rattled markets, or during periods of declining interest rates. (Falling rates lessen the appeal of risk-free assets such as U.S. Treasuries.)
And it was low rates that fueled last year’s run-up in gold prices. Most notably, the Federal Reserve cut short-term interest rates three times in 2019. In addition, the yield on the bellwether 10-year U.S. Treasury fell 77 basis points (0.77%) during the year to close at 1.92% on December 31—its lowest finish since 2012.8
Investors in gold also benefited in 2019 from the metal’s mettle during unsettling periods marked by September’s attacks on Saudi Arabia’s oil fields, the Brexit drama and the U.S./China trade war. Other geopolitical concerns extended gold’s rally into 2020. Fears of a protracted U.S. conflict with Iran sparked a 4% jump during the first week of January. With both sides recently dialing down their rhetoric, however, gold has given back some gains.
Looking ahead, in the near term it doesn’t appear likely that the U.S. will become embroiled in a fresh Middle East struggle. Stability in that regard would calm markets and decrease gold’s attractiveness. Three other factors have the potential to dull gold’s luster:
- Fed rate policy appears to be on hold for 2020 assuming the U.S. economy keeps plugging along at a measured pace—a strong possibility given December’s “unexciting” payroll report;
- Optimism about continued progress toward a trade deal; and
- U.K. Prime Minister Boris Johnson’s convincing win in December’s general election, which puts the U.K. on a clearer path out of the European Union.
In our view, gold is generally not the most effective asset to own in a long-term portfolio, at least not in the physical form of a “real” metal. Despite its reputation as an inflation hedge, gold on its own does not pay any dividend (as many stocks do), interest (as bonds do) or rental income (as real estate does). This lack of annual return means that gold may not be able to keep up with inflation over time, thus reducing its potential utility and suitability for this purpose. Moreover, gold’s fair value is exceedingly difficult to assess. Even after 2019’s strong performance, it’s not clear whether gold is currently close to its “fair value.”
That’s not to say that some gold exposure can’t add to a portfolio’s performance in some cases. But we think the benefits are more likely to come from owning an equity or bond of a fundamentally sound gold-related issuer—a mining company with operational strengths and an attractive valuation, for example—than from holding the metal itself.