Highlights

• Economic data continues to be mixed, with strength in the labor market and the consumer sector offset by weakness in global trade and manufacturing. Looking ahead, we think it is more likely than not that the positives will outweigh the negatives, helping the global economy to improve modestly in 2020.

• Stock prices have been rising in anticipation of stronger growth. We remain concerned that prices may have gotten ahead of fundamentals, which causes us to be only mildly constructive toward equities. But that doesn’t mean we aren’t finding select investment opportunities.

Economic data was uneven last week, and investors continued to focus on the on-again, off-again prospects for a U.S./China trade deal. Global stock markets were mixed, and the S&P 500 Index climbed very modestly, ending just below its all-time high.¹ The best performing areas of the market were energy, consumer staples and health care, while the industrials, consumer discretionary and technology sectors lagged.¹ In other markets, Treasuries showed weakness as the yield curve steepened somewhat while oil prices experienced their strongest week since June after OPEC agreed to additional production cuts.¹

Weekly Top Themes

1. Strong jobs growth data should stave off prospects for a near-term Fed rate cut. Jobs growth accelerated sharply in November. The data showed 266,000 new jobs were created last month, while the unemployment rate was down to 3.5%. Average hourly earnings climbed as well.²

2. We hold out hope for a modest U.S./China trade deal, but trade uncertainty remains a market risk. In August, President Trump signaled that the parties were very close to an agreement, which helped the S&P 500 Index rise 10% over the next 90 days.¹ More recently, markets have been rattled on-and-off by fears that a deal will fall through. It’s becoming nearly impossible to gauge what might actually happen on the trade front, but our best guess is that we will see a modest deal with the U.S. scaling back tariffs in exchange for the Chinese increasing agricultural imports. We could also see indications that such issues as intellectual property rights could eventually be discussed.

3. Manufacturing remains a source of weakness for the economy. The ISM Manufacturing Index disappointed by falling from 48.3 in October to 48.1 in November.³ Clarity on the trade front would help this sector, but manufacturing weakness remains a concern.

4. In contrast, consumer spending continues to be a strength. The University of Michigan’s Consumer Sentiment Index rose from 95.5 to 96.8 in November, showing that consumers remain confident about the state of the economy and are increasing spending levels.⁴

5. Looking ahead to 2020, signs of hope are emerging that global manufacturing could stabilize. Global Purchasing Manager Indexes have been showing signs of life, particularly when it comes to new orders, which rose for a second consecutive month in November.⁵ New orders are the forward-looking component of the index, and improvement there is consistent with our view that the global economy could pick up modestly in 2020.

Stocks Can Still Climb, But Selectivity Is Key

The U.S. economy and U.S. stocks have both enjoyed surprising strength over the last decade. By keeping interest rates at record lows, the Federal Reserve and other central banks have been providing ongoing monetary support that has produced the longest economic expansion in history, even if the pace of growth has been relatively slow.

Global manufacturing and trade levels, however, have been lagging since the expansion began 10 years ago, and experienced significant slumps in 2011/2012 and 2014/2015. In both cases, strong consumer spending and a solid jobs market helped prevent the drop in manufacturing and trade from pulling the broader economy into recession. The U.S. has experienced a similar environment in 2019. While trade and manufacturing have been lagging, there is still some hope for a phase one U.S./China trade deal and global manufacturing levels appear to be stabilizing. We expect we are in the midst of another period when recession fears will successfully be staved off for now.

We are generally positive on the global economy. Stocks have been climbing as investors have been discounting recession fears. We have been arguing, however, that markets may be getting ahead of fundamentals. We do not expect a sharp pickup in economic or corporate earnings growth, and we are concerned that the broad market may be pricing in such an environment.

As such, we would say that we are only modestly constructive on equities heading into next year. This doesn’t mean, however, that we are not finding opportunities. While broad market U.S. indices have been setting records, parts of the global market remain behind their highs of 2018. Many countries outside of the U.S. – as well as U.S. areas such as small caps, financials and resource-related stocks – have yet to return as strongly, which suggests that value can still be found. In sum, this looks to be a stock-pickers environment where selectivity is key.

Robert C. Doll, CFA, is chief equity strategist and senior portfolio manager at Nuveen.

 

¹ Source: Bloomberg, Morningstar Direct and FactSet
² Source: Bureau of Labor Statistics
³ Source: Institute of Supply Management
⁴ Source: University of Michigan
⁵ Source: Markit Economics