MARKET COMMENTARY

Bulls breathed a sigh of relief this week, sending the S&P 500 to a new record high of 3,168.80. The move was stoked by positive geopolitical developments. First, there was the news that the U.S. and China had come to an agreement on the text for a “Phase 1” trade deal. While there are still a number of trade items to still be addressed in a future agreement, the initial Phase 1 agreement is still expected to give the global economy a much needed jolt as we head in 2020. Next, UK voters spread holiday cheer to investors as they handed Boris Johnson a clear legislative mandate. His Conservative party crushed the Labour party, securing not only a comprehensive parliamentary majority but also winning a wide swath of seats though Labour’s heartland. The election result gives Johnson the votes necessary to extract the UK from the EU following the June 2016 referendum authorizing the government to do so, while the magnitude of the victory consolidates Johnson’s power as he now turns to negotiating terms for a post-Brexit trade deal. The market has been waiting on these items to resolve themselves for months, and consequently they overshadowed the Fed’s final FOMC meeting for the year and a weaker than expected retail sales report. For the week, the S&P 500 added 0.73%.

Fed Releases 2020 Outlook

The Federal Reserve capped 2019 by concluding its final FOMC meeting of the year on Wednesday. As anticipated, the central bank held rates at the current range of 1.50% to 1.75%, encouraged by the continued strength in the labor market. The Fed also released its 2020 interest rate outlook. It’s “dot plot”, a graph that illustrates each Fed member’s future projections on rates, indicated that, on balance, most members saw no interest rate hikes in the cards for 2020. Forecasts just seem to be made just to change, however. In 2019, the Fed had to vary from the dot plot when its hand was forced to unexpectedly cut interest rates three times throughout the year in order to maintain the U.S. economy’s momentum in the face of headwinds from the U.S.-China trade war and slow global growth. With a Phase 1 deal seemingly in hand, the indication is that some of 2020’s uncertainty has been removed, making it more probable that the Fed will be able to maintain rates at these levels through at least the coming year.

Savvy Shoppers Confound Economists

A promising start to the holiday shopping season was dashed as November retail sales figures failed to hit their mark. For the month, retail sales rose 0.20% to $528 billion. That was below expectations of a 0.50% increase. Excluding autos, gasoline, building materials and food services, retail sales rose 0.10%. Although the report took the wind out of retail stocks, there are a couple of reasons to suspect November’s figures may not be as disappointing as they first appear, and that this year’s holidays’ timing may be throwing off economists’ models. Shoppers appear to have taken greater advantage of pre-season sales this year, which managed to front load sales into October. This was evidenced in this week’s revision to the October sales report which was revised higher to a 0.40% gain from a previously reported 0.30% increase. In addition, a late-in-the-month Thanksgiving resulted in pent up demand from shoppers waiting for Black Friday. This means that Cyber Monday and the broader Christmas shopping momentum fell in early December which may not be handled correctly with the government’s seasonal adjustment factor having potentially over handicapped November’s results. The market was not overly concerned by the sales report given the strong job and wages figures and these other mitigating factors. Furthermore, anecdotal evidence from several major retailers suggest solid year-over-year sales growth should be expected.

Friday’s headlines touted a Phase 1 deal with China as a done deal, but as we have seen a number of times now, the definition of “done” varies depending on whether you’re listening to the U.S. or China. At a very minimum, the Phase 1 deal looks like a de-escalation in tensions with the U.S. agreeing to roll back some Chinese tariffs and halting additional levies which were set to take effect on Sunday. China, for its part, has agreed to make significant purchases of U.S. agricultural goods and roll back tariffs it placed on U.S goods. Directionally, this is all very positive, and indeed, words to this very effect have been formalized in mutually agreed upon text. Normally this would all be seen as sure thing, but while markets may have breathed a sigh of relief, they don’t quite seem ready to rally until they know for certain that the ink has dried.

The Week Ahead