FOCUSED INVESTING: ECONOMY & MARKETS UPDATE
The goal in every sports league is to be among the best teams and make it into the playoffs and ultimately win the leagues championship. Since 2019, the Los Angeles Dodgers own the most overall wins in baseball and were the favorite or one of the two favorites to win the World Series each year. However, the Dodgers won only in the pandemic shortened season of 2020. The Dodgers consistently had the best players to win the season, but not to win the whole thing. For the stock market, last week was the epitome of winning in the season but not the series. The bears – now we’re not talking the sports team– won the season early last week as U.S. stocks declined about 1.1% on sour economic news. However, the bulls won the series as U.S. stocks surged 2.1% on data that suggests the longer-term health of the U.S. economy is not so negative as the short-term readings.
What Happened Last Week?
Last week started on a sour note as the health of the manufacturing sector in the Northeast plunged deeper into contraction territory. The decline deepens the weakness in the manufacturing sector of the economy, which has been in a recession for 14 months. Solidifying this was industrial production numbers which eked out a 0.1% gain due to the auto industry; however, leaving autos out, industrial production declined 0.1% in December as business investment fell. The manufacturing reports drove stocks into negative territory early last week. On a positive note, retail sales increased 0.4% in December, delivering the same news as the retail sales data from the National Retail Federation the week before. The 0.4% increase was above expectations and continued the good news for the Christmas shopping season.
The recovery in the stock market started with initial jobless claims, which declined to 187,000 from 203,000 the week before. The decline was driven by the state of New York which saw a plunge of more than 17,000 claims last week. This means the rest of the country experienced an increase of about 1,000 initial jobless claims; this is still indicating a healthy labor market. The news that really pushed stocks higher on Friday was a second strong increase in consumer sentiment as both consumer thoughts on the current state of the economy and their outlook improved in December. Consumers do not always do what they say in surveys like this. If improvement in consumer sentiment continues for another month or two, we could then begin to breathe easier about the outlook for the economy because it takes two points to make a line, a third to make a trend, and fourth to confirm the trend; as of now, we have two points.
Coming this Week
This week is a big week for market moving data. The week started with U. S. Leading Economic Indicators dropping yet again in December, this time falling 0.1%. The overall decline outweighed the improvement in six of the ten indicators. Mid-week we will get a glimpse of the health of both the service and manufacturing sectors as the S&P Services and Manufacturing Indexes are released. Both are expected to show small declines in activity, but combined they are likely to show a still expanding economy. At the end of the week, we will get a picture of inflation when the PCE price index is released. Current expectations are for a decline in the year-over-year inflation numbers. Personal spending is expected to outpace personal income growth in December, confirming the retail sales data that showed consumers spent money for Christmas. Additionally, this is one of the biggest weeks for fourth quarter earnings as we get results from industrial companies General Electric, Raytheon, Lockheed Martin, energy services firms Baker Hughes and Halliburton, and technology companies Intel and IBM. The outlooks these companies supply will of course be more important than the earnings results and we are looking for a little uncertainty short-term, but a healthy longer-term outlook.
The data this week is likely to influence stocks. As with most economic reports, the effect is likely to be short-term overall. There are two reports that we believe can have a longer-term impact on both stocks and bonds and those are the PCE price index and consumer sentiment. If consumers believe economic conditions will improve, they are more likely to spend money currently and in the coming months. The inflation numbers feed into consumer sentiment, and with falling inflation, consumers are likely to feel even better about today and tomorrow, improving the economic outlook even more. The recent information about the health of the consumer and the services sector increases expectations that the Fed will be able to engineer a soft-landing. This would drive positive performance in both stocks and bonds this year. But, as we have seen, the data can turn quickly.
Clinton S. McGarvin, CFA, is a Senior Portfolio Manager. Clint is a part of the investment team covering Global Equities, Fixed Income and Real Estate Investment Trusts. He is involved in all aspects of managing client portfolios and has worked in the investment industry for more than 18 years with a strong track record of equity research, portfolio management, and client service. To speak with Clint McGarvin, please contact our office at (503) 292-1041 or via email at info@allentrust.com.