Market Commentary – January 2020
January was full of ups and downs as investors rode a wave of uncertainty. The month began with many of the benchmark indexes listed here losing value (except for the Nasdaq) only to surge ahead during the middle of the month. However, fears that a widespread outbreak of the coronavirus would impact global economic growth pushed investors away from stocks, which lost significant value by the end of the month.
By the close of trading on the last day of January, only the tech-heavy Nasdaq gained value, as each of the remaining benchmark indexes listed here fell, led by the small caps of the Russell 2000, which plummeted by more than 3.25%. The Global Dow dropped 2.75%, followed by the Dow and the S&P 500. Unfortunately, the momentum enjoyed in December didn't carry over to January for stock investors.
By the close of trading on January 31st, the price of crude oil (WTI) was $51.61 per barrel, well below the December 31st price of $61.21 per barrel. The national average retail regular gasoline price was $2.506 per gallon on January 27th, down from the December 30th selling price of $2.571 but $0.250 more than a year ago. The price of gold rose by the end of January, climbing to $1,592.70 by close of business on the 31st, up from its $1,520.00 price at the end of December.
|Market/Index*||2019 Close||Prior Month||As of January 1 st||Monthly Change||YTD Change|
|S & P 500||3,230.78||3,230.78||3,225.52||-0.16%||-0.16%|
|Federal Funds||1.50% – 1.75%||1.50% – 1.75%||1.50% – 1.75%||0 bps||0 bps|
|10-yr Treasury||1.91%||1.91%||1.52%||-39 bps||-39 bps|
*Chart reflects price changes, not total return
Last Month’s Economic News
- The US labor market ended the year with less momentum, as payroll gains cooled by more than forecast and wages rose at the weakest annual pace since 2018, even as unemployment held at a half-century low of 3.5%. Nonfarm payrolls rose 145,000 in December, the least since May, after a downwardly revised 256,000 advance the prior month; estimates called for 160,000 new jobs. Revisions subtracted 14,000 jobs from the prior two months, bring the three-month average to 184,000, the smallest since July. Average hourly earnings climbed a below-forecast 2.9% from a year earlier, the first sub-3.0% reading since July 2018. Although job gains picked up steam in the second half, hiring in 2019 was the slowest since 2011, at 2.11 million.
- US manufacturing closed out a tumultuous year with the weakest monthly performance since the end of the recession, with orders shrinking and factories continuing to dial back production. The Institute for Supply Management’s purchasing managers’ index fell to 47.2 in December from 48.1, the fifth straight month of contraction. It was the worst reading since June 2009 and marked the eight decline in the last nine months. The deterioration was driven by the weakest gauges of new orders and production since April 2009. The data show American factories remain plagued by pullbacks in business investment at home, softer demand throughout the world and, until recently, an escalating trade war between the US and China.
- A rebound in sales and production lifted a gauge of US service activity to a four-month high in December, indicating the broader economy remains stable in the face of further deterioration in manufacturing. The Institute for Supply Management’s non-manufacturing index climbed to 55, exceeding the median projections in a Bloomberg survey of economists, from 53.9 a month earlier. A measure of business activity, which parallels the group’s index of factory production, jumped 5.6 points to 57.2 from the lowest level since 2010. The improvement in services activity contrasts with ISM’s factory index, which contracted for a fifth month and posted the lowest reading since mid-2009. The ISM’s nonmanufacturing index averaged 55.5 for all of 2019, the lowest in three years and down from 58.9 in 2018. The annual average for the group’s factory gauge was the weakest in a decade.
- US factory production unexpectedly increased in December, a bright spot in an otherwise weak year for manufacturing. The 0.2% increase in manufacturing output followed a revised 1.0% gain in November. For all of 2019, factory production fell 0.2%, the first decrease in three years. December factory output was held back by motor vehicle manufacturing, which fell 4.6%. Excluding cars, factory production rose 0.5%, the most in four months. Capacity utilization fell to 77.0% from 77.4%. The December increase signals a pause in the manufacturing slump that began in 2019. While the US and China signed the Phase One trade deal this week, factories are still contending with a business-investment slowdown and weak demand from foreign customers.
- Orders for US capital equipment unexpectedly declined in December, capping a year of subdued business investment that weighed on the expansion last year. Bookings for non-military capital goods orders excluding aircraft, a proxy for business investment, fell 0.9% after a 0.1% gain in the prior month. The latest data add to signs of lackluster corporate investment amid weaker overseas demand and trade uncertainty with China, though tensions have cooled. A broader measure of bookings for all durable goods, or items meant to last at least three years, increased 2.4%, the most since August 2018. Shipments of non-defense capital goods excluding aircraft, a measure used in the calculation of gross domestic product, dropped 0.4%. The report showed the three-month annualized pace of business equipment shipments was down 0.7% in December vs. a 2.9% decline in November.
- US consumer spending moderated and business investment continued to deteriorate at the end of 2019, while a smaller trade deficit and more home construction helped keep economic growth steady. Gross domestic product expanded at a 2.1% annualized rate in the October-December period for a second straight quarter. Consumer spending decelerated to a 1.8% pace, below projections and the weakest since the first quarter, while a key gauge of prices watched by the Federal Reserve rose less than expected. Nonresidential business investment declined for a third straight period, the longest stretch since last recession. Even so, full-year GDP grew 2.3% in 2019, the slowest of Trump’s presidency and below his promised target of 3.0%. Economists expect growth to further moderate in 2020, as the waning effects for tax cuts and cooling wage gains make achieving that goal difficult in the late stage expansion.
- The Federal Reserve’s preferred underlying inflation gauge picked up, backing Chairman Powell’s view that price gains are moving toward the central bank’s goal. The broader personal consumption expenditures price gauge, which the Fed officially targets for 2% inflation, rose 0.3% from the prior month, topping the median estimate in Bloomberg’s survey, and was up 1.6% from a year earlier.
- China’s central bank trimmed the amount of cash that lenders must hold in reserve, and signaled continued action in 2020 to reduce borrowing costs for companies. The required reserve ratio for commercial lenders will be lowered by 50 basis points from January 6th, releasing about 800 billion yuan ($115 billion) of liquidity into the financial system. The cut aims to help banks reduce their lending rate to businesses. Currently, the required reserve ratio is 13% for big banks and 11% for smaller ones. The move shows the central bank is sticking to its practice of keeping domestic liquidity conditions relatively supportive amid a broader government drive to shore up the private sector.
- Europe’s manufacturers headed into the new year on a downbeat note, with expectations for both export orders and employment weakening at the end of a rough 2019. The latest sentiment figures from the European Commission came just hours after Germany reported an unexpected drop in manufacturing orders. The German data showed orders slumped 1.3% in November, the biggest decline since July and defying estimates for a 0.2% gain. The Bundesbank says Germany’s economy probably stagnated in the fourth quarter, and growth is set to remain below 1% this year. The euro-area expansion is forecast by economists to cool for a third straight year in 2020, to 1%.
- Four major international banks refrained from lowering interest rates in a move aimed at bolstering their respective economies. The Bank of England, the European Central Bank, the Bank of Japan, and the Bank of Canada each maintained their respective monetary policies last month. At the World Economic Forum in Davos, Switzerland, the United States gave notice that it was ready to address trade relations with the European Union. President Trump threatened to impose significant tariffs on European cars if a more favorable trade agreement between the United States and European Union could not be reached. Ongoing trade uncertainties have impacted Japan, which has seen its exports decline for thirteen consecutive months.
Aside from the impeachment trial that is now wrapping up, investors will be watching the employment figures for January and news from the industrial sector. Job growth slowed a bit toward the end of 2019, although numbers remained relatively strong, manufacturing and industrial production were generally weak for most of last year, impacted by the trade war between the United States and China. It will be interesting to see if the first phase of an agreement between the world’s largest economies is enough to help the manufacturing sector.
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