VIA NOVA UPDATE: Are the stock market clouds parting?

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  • The S&P 500 enjoyed its best week in seven years.

  • Powell and FOMC eased fears of excess tightening.

  • Trade truce on Saturday.

  • Healthy personal income gains helped power October spending growth.

  • The Week Ahead: OPEC and the jobs report will dominate the funeral-shortened week.

The S&P 500 enjoyed its best week in seven years.

Via Nova believes that uncertainties over the pace of Federal Reserve rate hikes and China trade tensions have been the two most significant market overhangs in 2018.  In the latest week, the markets received favorable news regarding interest rates on Wednesday and on trade with China Saturday night.  The interest rate news helped lift the S&P 500 nearly 5% in the latest week, and the trade truce with China could extend the rally into the coming week.  It was the best one-week gain for the S&P 500 in seven years and moved the index into positive territory for all of November.  All eleven sectors of the index rose led by technology, consumer discretionary and health care stocks.  Small cap, international and emerging market indexes also increased, but lagged the large cap S&P 500.

In other markets, Treasury yields edged lower due to the more cautious/dovish remarks from the Federal Reserve, which helped the Bloomberg/Barclays Aggregate Bond Index generate a small gain for the week.  However, the bond index remains lower by almost -2% year to date due to the persistent rate increases to date.  Oil prices fell another -6½% to close at $50/barrel, as concerns of excess supply weighed on prices.  The decline in oil prices will hamper earnings growth for energy companies in the coming quarters and could prompt production cuts if the price declines continue.  But while the price declines are a challenge for the oil industry, consumers are benefiting from lower gasoline and heating costs just in time to support holiday shopping.  Real estate rose, while gold prices held steady.  The trade-weighted value of the dollar rose and is up 4½% from a year ago.  A stronger dollar generally lowers the cost of imports for consumers but makes exports more expensive and less competitive.

Powell and FOMC eased fears of excess tightening.

The latest comments out of the Federal Reserve support our view that the central bank will adopt a more cautious and gradual approach to rate hikes in the coming months, which is positive for equities.  Stock prices jumped higher after Federal Reserve Chairman Jerome Powell said that interest rates are just below “neutral” in a speech on Wednesday, and that the Federal Open Market Committee (FOMC) will evaluate the need for future rate increases based on incoming data.  The remarks echoed the minutes of the November FOMC meeting, in which members cited recent weakness in housing, trade, business investment and global demand as factors that could curtail future growth, despite a healthy consumer.  The members also noted that reported inflation was acceptably low, and expectations for future inflation remained well anchored, which would limit the need for aggressive rate increases.  While most analysts expect a rate hike at the upcoming FOMC meeting on December 18-19, expectations are lower for additional increases in 2019.   

Trade truce on Saturday.

The U.S. and China struck something of a trade truce over dinner on Saturday night providing a sense of relief for investors who have been fearful of a downward spiral in relations.  The news could spark further gains in equity prices in the coming week.  Essentially, the agreement says that the two nations will hold off on further escalating tariffs for the next ninety days while negotiators work to hammer out differences on several key areas of disagreement.  While long term success is far from guaranteed, the immediate impact will be to slow a scramble by manufacturers to alter supply chains and find other workarounds before year-end.  China has pledged to increase purchases of American soybeans and energy, like natural gas.

Healthy personal income gains helped power October spending growth.

A stronger than expected increase in personal income, combined with high consumer confidence, helped lift consumer spending by a healthy 0.6% in October.  Moreover, the pace of wages and salary growth has accelerated over the past three months compared to a year ago.  The report was further evidence of a strong consumer and that economic momentum could continue into 2019.  The income and spending report also contained updates on the Fed’s preferred inflation measures.  The two inflation measures were not only at or below the FOMC’s longer range 2% target, the pace of inflation slowed over the past three months and will likely slow further as the effects of recent oil price declines are counted.  The report offered further evidence of contained inflation and a limited need to raise interest rates, which is positive for stocks.

The Week Ahead: OPEC and the jobs report will dominate the funeral-shortened week.

OPEC will hold a meeting to discuss whether to cut oil production in response to the recent plunge in oil prices.  Rumors suggest that Saudi Arabia and perhaps Russia will decide to trim output, but history suggests surprises are the norm with OPEC.

Also, the all-important November employment report is due out Friday.  Economists expect a healthy 190,000 increase in jobs but no change to the 3.7% unemployment rate.  The report also offers updates on wages earned and hours worked by industry and helps set expectations for other economic statistics coming out the remainder of the month.

Markets will be closed on Wednesday in memory of George H. W. Bush, the 41st President, who died at age 94.