Weekly Market Commentary February 19, 2019

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The S&P 500 surged 2.6% on the news an agreement had been reached to avoid a government shutdown and increased optimism about trade negotiations. Global stocks participated in the rally. The MSCI ACWI soared 2%. Bonds finished lower as the Bloomberg BarCap Aggregate Bond Index slipped 0.1%.

Earnings season is wrapping up. Nearly 80% of S&P 500 companies have reported results. Growth expectations remain around 13%. Amazon announced it is cancelling development of an additional headquarters in New York based on local opposition to the significant tax incentives offered to the company.

U.S. negotiators finished a round of negotiations in Beijing last week, and talks will continue this week in Washington. Negotiators are making progress, but there have been few announcements on the most challenging issues.

Key Points for the Week

  • U.S. retail sales dropped in December and missed expectations.
  • U.S.-Chinese trade negotiators made progress in Beijing, but difficult issues remain.
  • Global stock markets rallied sharply last week as investors focused on trade progress and the averted government shutdown rather than weak retail data.  


Market Analysis

When evaluating December’s retail sales data, keep in mind investment markets focus on the future, but they do so imperfectly. Retail sales for December sank 1.2%, as shown in the accompanying chart. U.S. retail sales are important because U.S. consumers have been a key source of global economic strength and weakening consumer demand would put additional pressure on global economies. The S&P 500 declined very slightly after the data was released Thursday morning, but it rallied sharply on Friday to extend the weekly gains.

Expectations were for a 0.1% increase, so the miss was sizeable. A deeper look at the data shows sales slowed broadly. When stripping out the more volatile parts of retail sales, the data looks even worse. Excluding automobiles and gasoline, sales declined 1.4% compared to expectations for a 0.4% increase. It wasn’t just physical stores that struggled. Online sales grew less than 5% in December, after growing around 10% in recent years.

Why were retail sales so weak, and why did markets move higher anyway? There are a few potential explanations. First, retail sales data is often revised, and investors may expect the results to improve. Second, some observers have seen a stronger link between the stock market and retail sales. Instead of reacting to the retail sales data, the fourth quarter market decline may have caused consumers to spend less. The government shutdown may also have contributed. Following that logic, the recent market recovery and deal to fund the government should push retail sales higher in coming months. Third, other news, such as optimism about a trade deal, may have trumped the retail sales data and pushed markets higher.

A more pessimistic explanation is that investors’ concerns about risk have faded with the recent market rally and the hope of a trade deal has captured their imaginations. Our thoughts are somewhat in the middle. The potential explanations above carry some validity, but we believe the muted reaction to the data is an indication of potential volatility ahead.

Fun Story

Dog accidentally runs half-marathon, finishes 7th

Ludivine, a two-and-a-half-year-old Bloodhound, was let out of her Alabama home to go to the bathroom recently, but she had other plans in mind. Ludivine ran a half-marathon and finished seventh, even after stopping at the two-mile point to sniff a dead rabbit. Her owner, April Hamline, couldn’t believe she ran the whole half-marathon because “she is actually really lazy.” How do you put a 13.1 sticker on a dog?

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