Stocks sliding again as bottoming process continues. After the 3-4% selloff Tuesday, the S&P 500 Index continues to slide in early trading. We view this morning’s action as progress toward a stock market bottom, and we could see enough fear today to set the stage for the next rally based on prior support levels, breadth, volume, put option activity, and other sentiment indicators suggesting a potential washout. While news that Chinese telecom provider Huawei violated economic sanctions against Iran isn’t helping, recent weakness has stemmed from three primary issues, all of which are tied to global growth concerns:
- Trade: Initial news coming out of the G20 was positive. Despite mixed messages in recent days, progress toward a resolution has been made. Factoring all the headlines in, we continue to see a deal coming into view in early 2019.
- Monetary policy: As expected, Federal Reserve (Fed) Chair Powell’s speech in New York last week delivered on our expectation that the Fed would not be as aggressive in 2019 as many market participants feared. On the yield curve, the more predictive inversions (2s, 10s and T-bills/10s) have not occurred, and even when they potentially do, stocks can continue to go higher based on history. Keep in mind that year-end supply issues may be distorting the short end of the curve.
- Oil: OPEC is meeting in Vienna today (see our latest blog on LPLResearch.com) and hopes for a coordinated production cut to lessen the downward pressure on oil prices remain high. Our projection was for a reduction in output of about ~1.3m barrels per day (bpd), but as of this writing (8:30 AM ET) it was unclear to what degree OPEC output would be reduced. Saudi officials threw out a smaller cut of 1m bpd. We believe supply is a much bigger issue for oil than demand, so we would not view $50 crude as an indication of increased probability of a recession in the United States.
ADP employment data misses, but labor market remains healthy. Today’s ADP employment report showed U.S. firms added 179k jobs in November, below consensus estimates of 195k, and signals that job growth in tomorrow’s November nonfarm payrolls report could fall short of the forecasted 190k increase. Meanwhile, a separate report showed initial claims for unemployment benefits fell to 231k last week but has trended higher over the past few weeks. While lower-than-expected payrolls growth and an uptick in claims may sound worrisome, investors place more emphasis on the nonfarm payroll data, and job creation levels >150k amid a very tight labor at this point in the cycle remains encouraging.
Global manufacturing divergence widens. The latest batch of global manufacturing surveys for November indicate the U.S. has strengthened its lead in terms of manufacturing health. The U.S. measures are highest (mid-to-high 50s) and held firm or accelerated last month-depending on the source-while China’s measures are at 50, the breakeven between expansion and contraction, and Europe’s measure, at 51.8, has fallen to near two-year lows. Overseas economies may benefit from fresh stimulus at some point and/or potential trade deals, but for now the U.S. economy remains the standout performer globally and remains our preference to focus asset allocations.
EM resilience. Since the September 20 peak in the S&P 500, as of December 4, the MSCI Emerging Markets (EM) Index has lost just 1.9%, much better than the 7.5% loss in the S&P 500 during that period. The developed international equity benchmark MSCI EAFE Index has fared slightly worse than the S&P 500 with a 7.8% decline. Despite this week’s confusion around what China has agreed to in trade negotiations, we view recent EM outperformance as a reflection of the market’s optimism that a deal will come into view before too long.
- ADP Employment Report (Nov)
- Markit US Services PMI (Nov)
- ISM Non-Manufacturing Index (Nov)
- Fed Beige Book
- Trade Balance (Oct)
- Initial Jobless Claims (Dec. 1)
- Durable Goods Orders (Oct)
- China Foreign Reserves (Nov)
- University of Michigan Sentiment Index (Preliminary, Dec)
- Jobs Report (Nov)
- Japan Leading Index (Oct)
- Germany Industrial Production (Oct)
- Eurozone GDP (Q3)
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