Could Santa save January? The well-known Santa Claus rally is considered to be in the last five days of the year and the first two days of the following year (ending today). Stocks have gained nicely over these last six days, and that could bode well for the rest of the month. The past five times Santa didn’t come (and U.S. stocks fell in this seven-day period), the S&P 500 Index actually fell during the month of January. We will take a closer look at the history of the Santa Claus rally later today on the LPL Research blog.
We continue to under-emphasize developed international stocks in our 2019 Outlook. Growth in Europe has been slowing and may struggle to reach even 2% in 2019, while political risk is rising, notably in Italy and the United Kingdom. Meanwhile, growth in Japan is also lagging, despite stimulus and corporate reform efforts. Consensus forecasts are calling for 2.1% real gross domestic product (GDP) growth in the developed world in 2019, specifically 2.6% in the U.S., 1.8% in the European Union, and 0.9% in Japan (source: Bloomberg).
Stick with emerging market equities for 2019. We favor emerging markets (EM) over developed international equities this year (with a bias towards emerging Asia) for suitable investors for EM’s solid economic growth trajectories, favorable demographics, attractive valuations, and the prospects for a U.S. trade agreement with China. GDP growth in China, as well as broader EM, is likely to more than double the pace of developed international economies in 2019, and we believe political uncertainty is actually higher in Europe than in EM. Though 2018 was a very difficult year for EM (down 15%), the economic and earnings growth outlooks, likely supported by more stimulus measures from China, and low valuations (below 11 times earnings estimates for the next 12 months, based on FactSet data).
Trade impact clearly evident. The official Chinese Manufacturing Purchasing Managers’ Index (PMI) for Dec of 49.4 is nearing the 2011 and 2016 lows at 49.0. Meanwhile, the broader Caixin Manufacturing PMI measure came in at 49.7, its first sub-50 reading since 2016, with particular weakness in new export orders. Export weakness, coupled with anecdotal evidence of slower growth in China from corporate America (see Apple news overnight), highlight the impact of the U.S.-China trade dispute. We continue to expect the dispute to be resolved over the next several months.
- S. ADP Employment Survey SA
- S. BEA Domestic Auto Sales SAAR
- S. Initial Claims SA
- S. ISM Manufacturing SA
- China Caixin Services PMI
- Nonfarm Payrolls SA
- Germany Markit PMI Services SA (Final)
- Eurozone CPI EU Harmonized Y/Y (Preliminary)
- Eurozone Markit PMI Services SA (Final)
- Eurozone PPI NSA Y/Y
- France CPI NSA M/M (Preliminary)
- France Markit PMI Services SA (Final)
- Italy Markit PMI Services SA
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Index data obtained via FactSet
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