FOR THE MONTH ENDING JANUARY- 2020
Welcome Trade News for the Markets
The signing of a phase one trade deal between the US and China on 15 January was welcome news for the investment markets. The agreement means the US will suspend its next planned round of tariffs, as well as cutting the existing tariff rates on around USD 110 billion of Chinese imports from 15% to 7.5%. In exchange, China has committed to boost its imports from the US by around USD 200 billion over the next two years; allow greater access to its markets for financial services companies; enforce intellectual property protections; and be more transparent in its currency management practices.
Economy Remains Solid
The US economy grew at an annualized pace of 2.1% in the final quarter of 2019 and broadly remains on solid footing. Manufacturing remains weak, with the December release of the Institute for Supply Management’s (ISM) manufacturing survey showing that the sector continues to contract. However, the services side of the economy remains resilient, and the ISM non-manufacturing survey picked up 1.1 points to 55.0 in December. And the consumer, the bedrock of the US economy, is still in good shape, with confidence rising significantly in January. The three-month average pace of job growth now sits at 184,000 per month.
The US earnings season for the fourth quarter of last year is well underway, with companies so far doing better than expected. Earnings per share and sales are growing at 6% and 2% year on year, respectively for the S&P 500.
What worked in Q4?
Information Technology was the best performing equity sector while Real Estate was the only sector that declined during the quarter. Health Care and Financials both had strong performance while defensive sectors like Utilities and Consumer Staples lagged. But for 2019 as a whole, all eleven S&P sectors basked in firmly positive territory.
Yield curve steepened in Q4
Short-term interest rates fell while longer term rates climbed in the fourth quarter. The spread between two- and 10-year Treasuries was negative in August, but this gloomy sentiment reversed in the fourth quarter. This spread not only widened in the fourth quarter but ended the year with the largest spread of 2019.
2020 Political Environment
Investors will closely watch the 2020 U.S. national elections to see which party will control the presidency and the Senate in 2021. There are a wide range of fiscal and tax views among the candidates, which in some cases could hurt the outlook for corporate earnings.