Record-high Consumer Optimism
The strength of the U.S. consumer might be the biggest story not being told right now, or at least not given the attention we think it deserves. On Friday the University of Michigan released its monthly consumer sentiment index data, showing sentiment has sharply rebounded from its lowest-ever reading back in August 2019, when the dreaded inverted yield curve stoked fears of an impending recession. Since that August 2019 low, the index has risen by +11.1 to reach 100.9 in February, its highest point since March 2018 [Figure 1].
This level of optimism is supported by Gallup’s January 2020 Mood of the Nation Survey, in which 74% of American adults expressed “peak” optimism about their future financial health, the highest level since the survey’s inception in 1977.1
Equities Rally, Value Rotation on Hold
Tracking with this high level of consumer optimism, equities rose again last week, with the US (SPX +1.7%) leading as International Developed Markets (MXEA flat) lagged. The narrow market continues, with large caps, tech, and growth leading, which means the value rotation that had been widely expected at the start of 2020 is on hold for now [Figure 2].
European Growth Rebound Looks Rocky
Hopes of a rebound in European growth are looking rocky, with factory orders in Germany and industrial production in the EU coming in worse than expected. And that’s before accounting for the Chinese slowdown. Flash PMIs due out this Friday will be some of the first data to include the virus outbreak.
Coronavirus Uncertainty Persists
Emerging Markets had a decent week, as Chinese equities (SHSZ300) continued their rebound, despite persistent coronavirus concerns. The coronavirus has certainly continued to dominate the news cycle. Apple (AAPL), the second largest company in the S&P 500 by market cap, came out on Monday to lower its already lowered revenue guidance for Q1 citing expected manufacturing and supply chain disruptions due to coronavirus. The big unknown for everyone right now is just how big and how long of an impact coronavirus will have. As of this writing, however, markets are still trading in a way that suggests the impact may be temporary and the recovery, V-shaped.
Accommodative Policy Buoys Markets
Our somewhat sanguine view of the virus’ potential impact being a short-term one is supported by increased Chinese stimulus and dovish monetary policy more broadly. The Fed appears poised to take an “ease first, ask questions later” approach to accommodation. Standing at-the-ready to support the economy, The Fed already proved this past summer that it doesn’t need to see the hard data before getting ahead of it. It’s also notable that the market pricing for Fed rates shows about 35 bp (~1.4 cuts) of easing by the end of 2020, despite rhetoric that Fed members are happy with the level of rates at the moment. This is supportive for equity markets.
Further, some EM central banks are once again cutting rates, especially those in Asia. These central banks were the first to lower rates last summer, and markets are focused on their actions and commentary for signs of developed central bank action. This week the PBOC (China’s central bank) meets and is expected to lower rates as well. No surprise then, that fixed income rates are lower on the year. Credit is in demand, but with spreads at such tight levels, we think the risk-reward may favor other, more equity-like areas of fixed income.
Democratic Nomination: Sanders and Bloomberg Ascending
Coronavirus has overshadowed recent U.S. Presidential Election news. Markets are just now starting to pay more attention to politics as the Democratic nomination process advances. Sanders and Bloomberg are ascendent, while Biden languishes in the betting markets. The Democratic party just hasn’t been able to coalesce around a candidate. This means the odds of President Trump winning reelection are increasing, an idea the market loves.
The Week Ahead: What We’re Watching
Coronavirus impact — The virus is likely to continue to dominate the news, as markets keep a close eye on infection and mortality rates. With earning season tapering off, Horizon will be watching for the first virus-impacted economic data, including the Flash PMI surveys for the US, EU, UK, and Japan on Friday.
Bloomberg ascendancy — On the heels of spending upwards of $345 million on advertising, Bloomberg qualified for this week’s Democratic debate, despite not being on the ballot in the Nevada Caucus. The market will be paying close attention to his performance.
Bigger market levers — There has been a fairly large divergence in domestic/international and growth/value splits of late [Figure 2], which could potentially create some opportunities. We’ll continue to watch for these.
To download a copy of this commentary and the chart of the week click the button below.