HI_Market Notes header_342019

GDP Shows Modest but Continued Growth

Stocks lost ground mid-week before rallying into the weekend on generally decent data and further optimism on a trade deal with China. It was the 10th straight week of positive returns, with the SPX breaking above 2800, a key resistance level.

Last year’s 4Q GDP came in at 2.6%, below the hoped-for 3%+ target, but not bad given all the cross-currents in the period. Consumer spending rose 2.8%, and business investment picked up too. For all of 2018, GDP climbed 2.9%, well ahead of the 10-year average of 2.3%. One asset class that had a tough week: gold, down more than 2%, the biggest drop since August, as investors moved to riskier assets, and the dollar strengthened.

In politics, there was much sturm and drang in Washington as Trump’s ex-attorney Michael Cohen testified before the House Oversight Committee, while Trump traveled to Vietnam to meet with North Korea’s president, Kim Jong-un. While both events made headlines and drove the news cycle neither seemed to move the markets very much.

Trade, however, was another matter. Reports over the weekend suggested that some kind of deal is near, and the deadline for reaching agreement was extended. If the U.S. gets more than the “NAFTA to USMCA” acronym change that seems to be the major result of renegotiating the North American trade pact, this would be a plus for the economy, boosting GDP while helping to contain price pressures. It’s worth keeping in mind that among S&P 500 companies, about 40% of revenues are earned abroad.

Another busy week is coming up, highlighted by the ECB’s decision on interest rates on Thursday and the release of payrolls data on Friday.

GAIN: Active Asset Allocation
It was something of a mixed week for global stocks as the market had a number of significant news events to digest. In the U.S., growth stocks generally did well, with large-cap up 0.88% and small-cap growth up 1.33%, according to Morningstar. European stocks finished in the green as well, as the MSCI Europe returned 1.22% in dollar terms.

In China, the Shanghai Composite continued its nine-month long rally heading into the weekend.  Hopes for a trade deal and expectations of further government support for the economy were the primary catalysts driving returns. In Hong Kong, the Hang Seng, which is dominated by mainland Chinese companies, was up as well. Emerging markets broadly saw a modest decline.

PROTECT: Risk Assist
After eight weeks of steady decline, volatility climbed slightly on the week to 13.56 as measured by the CBOE Volatility Index (VIX). Given all the noise, this was a relatively modest reaction on the part of the markets.

Of course, things can be too quiet and for those who are inclined to worry, the markets aren’t shy about providing something to worry about. A surprise (good or bad) to Friday’s jobs number or a loss of momentum on trade talks are two possibilities. Global growth has been slowing – and could slow further – but it appears to be leveling off, with support from the Federal Reserve and other central banks.

SPEND: Real Spend
Treasury yields moved up on the week closing on Friday with the yield on the 10-year closing in on 2.75%. Core PCE, the Fed’s favorite measure of inflation, remained below the 2% target at 1.9%.

In the equity yield space, international dividends did the best last week up over 1.3%, while small-cap domestic dividends did the worst, down -2.3%. High yield, preferreds, and convertibles were up, while mortgages and longer-dated Treasuries and corporates generally declined. REITS lost ground.

Stock returns continued to make up ground on bonds on a trailing one-year basis, with equities climbing 1.45% compared to 2.8% for bonds. Year-to-date, stocks returned 11.3% compared to just 0.63 for bonds.

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GDP Shows Modest but Continued Growth

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