Tuesday, December 17, 2019
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It’s the future that matters
The stock market hit record highs on Monday.
Last week saw the resolution of the two biggest macro risks still facing investors in 2019 — the U.S.-China trade fight and Brexit — and this week started with a few positive readings on the U.S. economy.
Monday’s highlight came from the National Association of Home Builders, which reported that sentiment hit a 20-year high in December while posting the biggest monthly increase in two years.
But investors also received encouraging news about the overall U.S. economy from IHS Markit and a reading on manufacturing activity in the New York Fed’s district that showed optimism improved for the second-straight month.
Chris Williamson, chief business economist at IHS Markit, said Monday that, “The surveys bring welcome signs of the economy continuing to regain growth momentum as 2019 draws to a close, with the outlook also brightening to fuel hopes of a strong start to 2020.”
But financial markets have for some time been saying as much.
Monday’s record highs in all three major indexes followed a record close on Friday for the S&P 500 and the Nasdaq. Both of which closed at record highs on Thursday.
Economic data are always, of course, in some way “catching up” to financial markets. Markets are trying, on a daily basis, to discount future growth or future slowdowns. They will almost always be ahead of economic data in this process.
Outlined most broadly, then, the sell-off we saw last December — while perhaps influenced by the dreaded machines — was the market saying that higher interest rates would lead to slower economic growth in 2019. The stock market’s rebound reflected optimism that a pivot from the Federal Reserve would keep a much-feared recession at bay. The data are now confirming that the market’s rally this year has been directionally correct — things are indeed getting better.
And so we wrap up what’s been a stellar year for risk assets, the natural question becomes: what is priced in for 2020 and have we “borrowed” returns from the future.
Analysts at Bespoke Investment Group noted Monday that, “there is little evidence that the S&P 500's performance one year impacts its performance the next in either a positive or negative way.” Consensus suggestions that the 2020s must necessarily be a decade of lower returns because we are completing a robust decade for financial markets are only in part empirically sound.
Sam Ro noted on Monday that some analysts were perplexed by the market’s muted reaction on Friday to the near simultaneous Brexit and trade news. But if the market had already “priced in” a trade deal, there’d be no reason to expect additional enthusiasm for a deal that seems tenuous at best.
Instead, it seems the market has started growing enthused about exactly the kind of data we saw Monday: sign of directionally improving U.S. economic fortunes amid continued easy policy from the Federal Reserve.
“Although trade tensions and the presidential election remain key downside risks, we expect looser financial conditions to drive an acceleration in GDP growth from the second half of next year onwards,” said Paul Ashworth, chief U.S. economist at Capital Economics on Monday.
“We forecast that GDP growth will be 1.9% in 2020 and an above-consensus 2.4% in 2021. Despite that acceleration, the Fed is likely to remain firmly on the side lines, with rates remaining at, or slightly below, current levels for at least several more years.”
That’s the whole story.
By Myles Udland, reporter and co-anchor of The Final Round. Follow him @MylesUdland
What to watch today
Economy
8:30 a.m. ET: Housing Starts, November (1.340 million expected, 1.314 million in October); Building Permits, November (1.405 million expected, 1.461 million in October)
9:15 a.m. ET: Industrial Production month-on-month, November (0.8% expected, -0.8% in October); Capacity Utilization, November (77.4% expected, 76.7% in October)
10 a.m. ET: JOLTS Job Openings, October (7009 expected, 7024 in September)
Earnings
Post-market
4 p.m. ET: FedEx (FDX) is expected to report adjusted earnings of $2.78 per share on $17.66 billion in revenue.
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