HIGHLIGHTS:
Markets favored healthy fundamentals over Middle East threats.
The economic landscape remains sound – moderate growth with low inflation.
Via Nova’s outlook remains positive but expect bouts of volatility.
Markets favor healthy fundamentals over Middle East threats.
Escalating U.S. – Iran tensions sent tremors through the stock market in the latest week – but only for a few hours. Word that both sides were taking a step back from the threat of war allowed investors to refocus on recent positive events: the imminent signing of a Phase One trade deal with China, a steady, low interest rate policy from the Federal Reserve, forecasts of higher corporate profits growth and an orderly Brexit deal. The S&P 500 added 1% for the week and has risen 14% over the past three months. “It’s a Timex market that takes a licking and keeps on ticking,” said Scott Clemons of Brown Brothers, Harriman, a New York investment firm. Via Nova agrees, though complacency appears to be on the rise.
The economic landscape remains sound – moderate growth with low inflation.
The latest round of economic data suggests that the economy is strong enough to rekindle sales and profits growth, but not too strong where inflation surges and forces the Federal Reserve to resume raising interest rates. That balance of moderate growth and low inflation tends to be fragile and cannot be taken for granted, but for now is the most likely scenario in 2020.
The continued moderate growth picture was supported by a solid, though weaker than expected, rise in the December jobs report along with a 5-decade low in the unemployment rate. Jobs have been rising for the past ten years. However, wage inflation remains relatively tame, which allows the Federal Reserve to hold interest rates low. Business activity surveys also improved suggesting stronger production and sales this year. All this data supports our view that the economic fundamentals are firm and can support higher sales and profits growth.
Via Nova’s outlook remains positive but expect bouts of volatility.
The economic and political developments over the past several months back our view that the U.S. and global economies can enjoy a moderate economic recovery in 2020 and support a further rise in equity markets. However, we do not expect that market advance to be steady or smooth. Corrections of 5% and 10% are a normal annual occurrence even in healthy bull markets. We believe the stock markets are already pricing in much of the recent good news, which could make markets vulnerable to either negative surprises or even a pause in good news.
Markets expect to be cheered by the signing of a Phase One U.S.–China trade deal in the coming week, but then attention will likely turn to fourth quarter corporate earnings reports. The focus will be on guidance from senior managements that could either reinforce or challenge the generally favorable outlook. Stay tuned.