Stocks were up this week as tensions between the U.S. and Iran appeared to turn from military to diplomatic. A weaker than expected jobs number was unhelpful but did not rattle investors. Next week we start hearing from companies as they report their full-year 2019 results. With equity valuations above average, companies need to show that earnings growth in the coming year is going to be robust. Any sign of weakness will likely be discounted in stock prices quickly. We do not recommend shying away from equities at this stage, but we have added a low volatility bias to our equity portfolios to reflect higher uncertainty.
Headlines This Week
The U.S. economy added 145,000 jobs in December, slightly below Wall Street’s consensus of 160,000.
- Seasonal retail jobs, construction, and healthcare led employment in December.
- Manufacturing jobs saw a decline.
All Eyes on Persia
The tension between Iran and the U.S. tested markets across the Globe. For a short period, U.S. Treasury yields declined, and Gold reached a 6-year high. Equity market volatility rose but quickly subsided once both nations deescalated tensions.
- The U.S. and China agreed to a scheduled signing of phase one of the trade deal next week.
- Trump previously had said that after signing the phase one deal with China, he would travel to Beijing to begin a discussion on the next phase.
- The Brexit deal has cleared another hurdle after the U.K. Parliament backed Prime Minister Boris Johnson’s Brexit deal.
- The U.K. will leave the European Union (EU) on January 31st and will begin working on an actual trade deal with the EU.
The U-6 Unemployment Rate
While the headline jobs number (+145,000 jobs created) tends to get all of the attention, we like to remind readers that there are other essential data points in this report. One such number is the U-6 Unemployment Rate. How does this differ from the headline unemployment rate, which came in at 3.5% this month? This rate includes the unemployed, the underemployed (part-time workers who want full-time work) and discouraged workers (those who have given up looking for a job). While 6.7% is nearly double the headline rate, it is the lowest it has been in its 25-year history. As this number creeps lower, it will continue to put upward pressure on wages.
The Week Ahead
Notable Earnings Next Week: Sector bellwethers JP Morgan (JPM), BlackRock (BLK), UnitedHealth Group, Inc. (UNH), U.S. Bancorp (USB), and Fastenal Co (FAST)
- JP Morgan is expected to post strong earnings due to a “meaningful” quarter from their trading department, which has seen opportunities due to volatility fueled by political and economic turmoil as of late.
- UnitedHealth is the most significant player in Medicare Advantage plans, which has helped contribute to its growth, but the 2020 election could potentially bring drastic changes to this landscape.
U.S. and China signing phase one of the Trade Deal
- China’s Vice-Premier is expected to attend the event, which experts say is a reminder relations have not improved to the point that China’s Premier would attend himself.
- Despite some ambiguous comments relating to the timing of the deal signing, it is expected to take place on the 15th.
- Comments on what to expect for the next phase will be critical.
December U.S. Consumer Price Index (CPI)
- The year-over-year inflation for December is expected to increase slightly from 2.1% to 2.3%.
The Fed releases its Beige Book on Wednesday
- Each of the Federal Reserve Banks provides insight into the current economic conditions, along with interviews with economists, market experts, and others.
- While not meant to be as predictive or impactful as the FOMC meetings it precedes, many often look to the Beige Book for insight into what some of the leading minds think of the current state of the economy.
Stock Highlights from Max
The stock market did not let a turn of the calendar derail its flight plan. Stocks in the aggregate continued their climb to new highs. Even tension in the Middle East did not derail stocks nor boost the Energy sector, which is a laggard out of the gate so far this year. Communication Services, on the other hand, is leading the market higher. Speaking of flying…
- Boeing Corp. (BA) entered 2020 with new controversies. A Boeing 737 plane was initially reported to have crashed shortly after take-off in Iran due to “technical problems,” killing all 176 passengers. The 737-800 is the predecessor plane to the troubled 737 Max, which has been grounded since last summer. The next day it was released that Canada, along with several other Western governments, have evidence that the doomed flight of the Ukraine International Airline was not a crash but was shot down by Iranian anti-aircraft missile.
- Not even a day later, more bad news hit the company as a cache of documents released by the company to Congress shed light on a disturbing picture of the length the planemaker was going to evade regulatory scrutiny of the 737 Max. The most quoted statement from the documents is one from a pilot in 2016 who told a peer, “this plane is designed by clowns, who in turn are supervised by monkeys.”
- The two developments were coming on the heels of a rumor circulating in investment circles that Warren Buffet is building a position in the company.
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