Media headlines remained rampant during the week as trade talk developments and impeachment proceedings provided an abundance of material for amplified and highly subjective conclusions. The effects of such headlines played a critical role in guiding sentiment tied to risk assets, such as equities, and managed to push them higher (at least for this week). The FTSE All World Equity Index gained 0.42% for the week and marked its sixth consecutive week of gains. The domestic Standard & Poor’s (S&P) 500 closed the week higher by 0.94% and has also managed to post upside over the past six weeks. If we take a step back and gauge the catalysts of such positive sentiment, it’s difficult to attribute them to positive trade outcomes or anything associated with actionable insight on looming uncertainties. Rather, the notion of better than expected earnings has been an objective driver of returns, as has the on-going positive backdrop of consumers’ fiscal health. This short-term pivot in allowing fundamentals to take hold of market activity is an immense positive, in our view, because it provides a workable approach to risk management when we assess equity market participation. Stated differently, when we gain a quantifiable understanding of what the market is perceiving as positive, or negative, then the analysis associated with such data tends to often produce better results. As it relates to equity market performance, it’s important to note that the S&P 600 (small capitalization index in the U.S.) has managed to maintain a similar return profile as the S&P 500 over the past six weeks, despite short-term deviance on a daily basis. Such a fact remains significant because it provides a further gauge on investors’ risk appetites. We remain constructive on equities over the next 12 months and remain ready to take advantage of all opportunities, many of which appear in the form of short-term downside.
Domestic economic data releases remained light for the week, yet they managed to provide a better understanding as to the path of monetary policy. We learned that the main domestic inflation gauge cooled by more than what had been anticipated. The annualized increase in the Consumer Price Index (CPI) was posted at 1.7% versus the 1.8% projected by economists. The inability of the Federal Reserve to maintain inflation at, or near, 2% has been an on-going issue. It was merely 12 months ago when the Fed indicated their willingness to let inflation run above 2% in the interim but, unfortunately, that has not been an option. The latest data provides an avenue for further interest rate cuts domestically under a scenario where additional data points fail to produce strong results. Our internal view is that the path to higher inflation is in our favor over the next 12 months simply because of the possibility of notably higher wage growth data, a function that may push unit labor costs higher and eventually drive broad inflation higher. Higher inflation remains relevant in the U.S. because it has an ability to promote consumption in the present rather than postponing it.
In other news, we learned during the week that small business optimism data, as reported by the Conference Board, was reported slightly better than expected. Additionally, data tied to October retail sales revealed an expansion of 0.2%, relative to the 0.3% estimate, while data tied to industrial production declined by half of what was anticipated. Such a beat on industrial production bodes well with the comments from Fed Chair Jerome Powell on the bottoming phase of the manufacturing slowdown in the U.S. We’ll be paying close attention to upcoming manufacturing growth data, as well as on the non-manufacturing sector (i.e. services), as a gauge of what the Fed may do next. Of most importance, however, remains the upcoming Phase 1 trade negotiation with China.
Edison Byzyka, CFA – Chief Investment Officer – Chair of the Investment Policy Committee
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg. All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites.
The FTSE All-World Index is a market-capitalization weighted index representing the performance of the large and mid-cap stocks from the FTSE Global Equity Index Series and covers 90-95% of the investable market capitalization. The index covers Developed and Emerging markets and is suitable as the basis for investment products, such as funds, derivatives and exchange-traded funds.