More volatility. U.S. stocks are lower this morning as another wave of coronavirus outbreak fears curbed risk appetite. European stocks are being hit harder this morning after the Bank of England kept its policy rate unchanged (amid speculation of a rate cut), and the United Kingdom’s January 31 exit from the European Union neared. The S&P 500 Index has rebounded from a 2.6% pullback, but more volatility could be in store amid heightened global uncertainty and as traders and investors potentially step back after a strong rally.
Average GDP growth. Gross domestic product (GDP) rose 2.1% in the fourth quarter of 2019, according to Bureau of Economic Analysis data released today. Net exports added 1.5 percentage points, its largest contribution to quarterly GDP growth in 10 years, as global demand picked up and domestic demand slumped. Consumer spending contributed 1.2 percentage points. Overall, GDP increased in 2.3% in 2019, an average result in an otherwise challenging year for the macroeconomic environment. We’ll dig deeper into GDP data today on the LPL Research blog.
Fed keeps policy unchanged. On Wednesday, the Federal Reserve (Fed) announced it would keep rates unchanged while signaling current policy would be “appropriate” to lift inflation to policymakers’ 2% target. Fed Chair Jerome Powell stated in his post-meeting press conference that downside risks (like the coronavirus outbreak) are still prevalent, hinting that policy may stay accommodative for a while as policymakers assess the impact of different headwinds on the U.S. economy. Powell also characterized consumer spending as “moderate”, a downgrade from his mentions of “strong” consumer spending in comments during recent meetings.
Brexit day almost here. Tomorrow the U.K. will end its 47-year membership in the European Union (EU), entering an 11-month transition period to allow European leaders to negotiate terms of the U.K’s future relationship with the EU. We expect an agreement to be reached, but if not, a potentially economically damaging “hard Brexit” remains a possibility. We do not anticipate any meaningful impact on global markets this week or at year end, but cannot completely remove Brexit from the list of 2020 risks just yet. Look for more from us on Brexit on our LPL Research blog tomorrow.
Non-U.S. equity valuations remain relatively attractive. Valuations are closely tied to long-term stock performance, so discounts for equities outside the U.S. as global growth has begun to stabilize may warrant attention for long-term investors. On a forward price-to-earnings (PE) basis, the S&P 500 Index is trading at 18.2 times, near our estimate of fair value given low interest rates and inflation. Developed international and emerging market equites are at 14.7 and 12.7 times, based on the MSCI EAFE and EM indexes, still near five-year averages and above-average discounts to the U.S. (source: FactSet). Discounts in EM have gotten a bit bigger of late due to the coronavirus outbreak and may represent an especially attractive opportunity if the virus is contained.
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