Happy Thanksgiving! After a few weeks where growing hopes of a U.S.-China trade deal propelled markets higher, the opposite occurred last week. Trade negotiations took a small step backward, and global stocks followed. Other global economic news was generally positive. The U.S. manufacturing sector seems to have bottomed and is returning to growth. European data showed manufacturing remains weak but also indicated the damage trade is having on manufacturing is starting to slow.
Key Points for the Week
- China and the U.S. seemed to move further from a trade deal as negotiations continue.
- Housing continues to support the U.S. economy, while manufacturing may be bottoming.
- Mini-cycles make the longest recovery ever-less exceptional.
U.S. homebuyers continued to take advantage of low interest rates as 8.2% more single-family homes were started last month compared to a year ago. As the accompanying chart shows, single-family home starts have picked up in recent months, while construction of multifamily homes (apartments) have slowed. The growth in multifamily housing coincided with the financial crisis and has remained at elevated levels. Single-family home growth is one indicator first-time homebuyers are starting to form households and potentially expand their families. Kids and bigger houses both support the economy.
The S&P 500 dipped 0.3% last week. The global MSCI ACWI also dropped 0.3%. The Bloomberg BarCap Aggregate Bond Index rebounded 0.3% as slowing trade pushed economic growth down and lowered the yield on fixed-income investments.
Next week’s economic data schedule is light as the Thanksgiving holiday will delay some data points. The U.S. durable goods report on Wednesday will provide additional information on whether manufacturing continues to recover. Asia is very reliant on trade, and data from Japan, China and India will provide insight into how those countries are adjusting to the new trade environment.
Manufacturing Recovery while the Consumer Slows
There will likely be a reversal in the trend of weak manufacturing data contrasted with strong consumer data. Manufacturing has borne the brunt of the trade challenges as lower demand from overseas has been coupled with uncertainty in the U.S., delaying business investment.
Because business investment often takes the form of new buildings, additional equipment or additional technology hardware, the slowdown in manufacturing has been broad-based. But slowdowns in capitalism are often overwhelmed by a natural trend toward creativity, problem-solving and growth. Businesses all over the world are adapting to the new trade rules and coming up with solutions. The economy has reached the “heal or deal” stage — either the economy will start to heal or a deal will be reached.
Consumers have been protected from the manufacturing and trade slowdown by a strong demand for labor, leading to low unemployment and steady wage growth. The strong employment market has been supported by an underlying strength in the services markets. Manufacturers often ship all over the world. Services are more localized, and the weakness overseas has been slow to affect the U.S. economy.
Eventually, though, the weakness in manufacturing will spread to the rest of the economy. Expect job growth to slow down in coming quarters and wage growth to moderate, too. Growth is still expected to be positive, just not as robust as in recent quarters.
Even if a trade deal is signed, the recovery will take a while to affect the broad economy in the same way the slowdown has taken some time to work its way through the system.
This news may lead to concern about how the market might react. There are definitely risks. But investors should recall stock markets do not focus on past, or even current, data. Instead, they focus on the future. So don’t be surprised if during a period of slowing economic growth, the market turns higher.
Apologies for sending an academic article, but the topic seemed appropriate. Researchers suggest being thankful for our material blessings is hard because money doesn’t make us happy. Some of you may be celebrating the good news because you think it shows people are more focused on important things, such as family, friends, experiences, and spiritual connection. Unfortunately, the news points in the opposite direction. These researchers found people were happier with having more money when it allowed them to pass someone else on the income list. It is a good reminder as to why we need a national day of Thanksgiving.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds
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