The last week’s market highlights:
Quote of the week:
“It is better to debate a question without settling it than settle a question without debating it.” – Joseph Joubert
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.
Addressing the elephant—and the donkey—in the room
Although Senator Bernie Sanders won the popular vote in the Iowa caucuses and New Hampshire primary, and he maintains a lead in most, if not all, national polls, the race for the Democratic presidential nomination is shaping up to be the most hotly contested in years. The crowded field of aspirants, along with the many primaries that award delegates based on the percentage of votes received, increases the possibility that no candidate will garner the delegates needed to clinch the nomination before July’s Democratic National Convention.
According to FiveThirtyEight.com, an opinion poll analysis website, the most likely candidate to secure the nomination is …”No one,” with 42%. Sanders is running a distant second (35%), followed by former Vice President Joe Biden (12%) and former New York Mayor Michael Bloomberg (9%). Of course, the needle could move in any direction over the next few weeks, starting with the South Carolina primary (February 29), followed by “Super Tuesday” (March 3), a 14-state primary bonanza in which more than one-third of all delegates will be allocated. All told, about two-thirds of the delegates will have been pledged by the end of March.7
In our view, heading into the convention without a nominee may not only muddy the political waters but also make investing based on the eventual presidential outcome even more challenging. After all, it’s hard to tease out the impact of political risk on equity markets. Health care stocks, for example, have lagged the broad S&P 500 Index thus far in 2020.8 Has that underperformance been the result of candidates’ endorsing “Medicare for all”—the supposed death knell for health care—or the sector’s relatively subpar fourth-quarter earnings? It’s hard to say.
Perhaps the most powerful lesson for investors is to avoid predicting how stocks will behave once the election is over. Many market analysts believed equities would plunge following Donald Trump’s win. Those who turned bearish based on that incorrect call have missed the opportunity to fully participate in a stellar rally: Since Election Day 2016, the S&P 500 has gained an impressive 67%.9
From now until Election Day 2020, equity markets will closely monitor the Democrats as they duke it out, and then the head-to-head contest between the eventual nominee and Trump. But as we stated in our 2020 Outlook, we doubt politics will be this year’s main driver, despite all the attention that the battle for the White House will inevitably garner. Instead, factors such as the pace of the global manufacturing recovery, the health of the U.S. economy and the impact of the coronavirus will be key to determining how stocks ultimately perform this year.
The inverted yield curve makes an encore appearance
After inverting briefly in late January and early February, the U.S. Treasury curve did it again last week. On all four days of the Presidents’ Day-shortened week, the yield on the 3-month Treasury bill closed above that of the bellwether 10-year note. (Typically, yields are higher on longer maturities than on shorter ones). The 3-month and 10-year yields ended the week at 1.56% and 1.46%, respectively.10
Although an inversion has historically preceded U.S. recessions, the most recent series of this anomaly is more about global risk aversion, due in large part to the coronavirus, and less about acute U.S. recession risks. (We explain more here, in our most recent paper on the inverted yield curve.) In fact, the odds of a recession have fallen over the last 6-9 months, reinforced by last week’s positive economic data releases:
- Housing starts in January hovered near their best levels since December 2006, and building permits, a forward looking indicator, surged to a 13-year peak. Not surprisingly, homebuilder confidence remained close to a two-year high in February. Steady job growth, rising wages and low interest rates are fueling demand for homes.11
- After falling or remaining unchanged for the last four months, the Conference Board’s index of leading economic indicators (LEI) jumped in January, driven by a sharp drop in initial unemployment claims, consumers’ favorable outlook on the economy and last month’s spike in building permits. According to the Conference Board, U.S. GDP appears poised to continue its slow, steady pace of growth through early 2020.
Last week ended with a slug of disappointing news, however. According to IHS Markit’s “flash” (preliminary) purchasing managers’ indexes (PMI), business activity contracted in February for the first time since October 2013. The normally resilient service sector experienced weakness, while manufacturing production nearly ground to a halt. One silver lining in the report: A notable increase in business sentiment, reflecting widespread optimism that the current slowdown will prove short lived.