The last week’s market highlights:
Quote of the week:
“The future is something which everyone reaches at the rate of 60 minutes an hour, whatever he does, whoever he is.” – C.S. Lewis
Each week, we present our featured topics in the context of the major themes listed below from Nuveens 2019 Outlook :
- U.S. economy: A slowdown, not a recession
- Global economy: Amid lower expectations, emerging markets could surprise to the upside
- Policy watch: Fewer tailwinds, stronger headwinds
- Fixed income: Rates likelier to rise than fall
- Equities: Late cycle but good value
- Asset allocation: A neutral stock-bond view
U.S. economy/equities: Still so far, so good
In “The Godfather,” Tom Hagen (Robert Duvall) menacingly utters one of the film’s many memorable lines: “Mr. Corleone is a man who insists on hearing bad news immediately.” No doubt the “don” wouldn’t have been happy if—like today’s investors—he’d been forced to wait until February 14 to get the bad news about December’s retail sales. Because of the government shutdown, that’s how long it took to learn that this closely watched indicator had plunged 1.2%, suffering its worst month since September 2009. And the retail sales “control group” (which excludes sales of automobiles, gasoline and construction materials and is used to calculate GDP) fell even further (-1.7%) in December. (This data reinforced concerns that the U.S. is not only in the late stages of the current business cycle, but also that the end of the cycle is imminent.)
Last week, though, a major U.S. retailer reported better-than-expected earnings, revenue and same-store sales. These results helped alleviate concerns that consumer spending, which makes up about 70% of the U.S. economy, may be weakening. In fact, we think consumers could continue to keep their wallets open amid robust job creation and indications of increasing wage growth. That said, we’ll be closely monitoring future retail sales—the control group in particular, as it’s frequently revised—for more concrete signs of strength from U.S. shoppers.
Overall, last week’s economic data releases were mixed. On the plus side, first-time unemployment claims fell sharply, providing further evidence of the job market’s resilience, and homebuilder sentiment hit a four-month high. Housing has been a soft spot for the economy since last fall, so any signals of improvement would be welcome. Among the negative reports: December durable goods orders (aircraft, machinery computer equipment and other big-ticket items) came in below forecasts, and orders for “core” capital goods (a measure of business investment) declined.
In terms of U.S. equities, while the market may be “overbought” given its furious rally year to date, stocks don’t appear to be particularly overvalued. To illustrate, the S&P 500 is trading at around 16x forward earnings versus a recent high of 18.4x about a year ago. Moreover, various potential headwinds—including the impact of the government shutdown and further Fed rate hikes—are gradually disappearing, and the odds of a full-blown trade war have declined. In this environment, U.S. equities could grind even higher this year.
International equities: It may be time to travel
In 2018, as we had anticipated, international stocks encountered a more volatile world. Markets were pressured by rising rate concerns, a stronger U.S. dollar, an emerging-markets (EM) selloff, slowing economic growth, political uncertainty and global trade worries fueled by new tariffs.
This year, we see the U.S. decelerating, albeit from a high base, while international developed and EM economies are accelerating from a poor 2018. This growth “switch,” combined with a more stable interest-rate environment, a weakening dollar and lower oil prices, should aid non-U.S. companies, especially those in emerging markets. Another expected tailwind, and a major one at that: We think China and the U.S. will ultimately reach a trade agreement, in whole or in part. This will likely help stabilize sentiment in EM countries. In addition, valuations overseas are attractive relative to their historical averages and versus the U.S. The overall impact of these factors, in our view, creates a favorable outlook for international equity investing in 2019.
Indeed, EM stocks have begun the year in style, with the MSCI index up 9% (in local terms) through February 22. Chinese shares, which make up about one-third of the index, have rebounded sharply (+12.4% year to date in local terms) after a difficult 2018 (-24.6%). They’ve been bolstered by fresh monetary stimulus from China’s central bank and by the Federal Reserve’s dovish U-turn in January, when Chair Jay Powell signaled a pause in the Fed’s previously communicated plans to hike rates this year. That decision contributed to a weaker U.S. dollar, often a boon for EM equities.
In addition, Beijing has fast-tracked infrastructure projects and cut personal income taxes to stimulate consumer spending. The latter move may be paying off, as online sales have moved off their recent lows. High hopes on the U.S.-China trade front have encouraged investors as well. Last week, reports surfaced that the two sides had made progress in resolving some of the thorniest issues, including forced technology transfers, cyber theft and intellectual property rights. Trade optimism has likewise lifted stocks in South Korea, another major constituent of the MSCI Emerging Markets Index. Meanwhile, Brazilian shares have benefited from low inflation and interest rates, a market-friendlier government and a recovering job market.