Stocks fell in a holiday shortened session on Friday. There was no real news to account for the decline. Profit taking was about as good an explanation as anything.
Today, being the start of the first week of the month, we will get a flurry of economic data and a first look at November. Weekend retail activity, particularly online, was strong. However, one should remember that the time between Thanksgiving and Christmas this year will be almost a week shorter than last year. Using the basic assumption that most of us do our Christmas shopping between the two holidays, comparing day-to-day will be a bit confusing. In addition, in years past, Black Friday sales began between 5 and 6 AM on Friday. Now they are spread out over the entire Thanksgiving week. But with all of that said, most merchants were pretty happy with the sales results over the past several days. That is a good backdrop for the week ahead.
As noted, we will get a lot of November data this week. Perhaps the two biggest pieces of info are going to be today’s PMI report and Friday’s employment data. Manufacturing has been the weak spot of the economy for months. Lately, there have been some indications of stabilization. Overnight, Chinese manufacturing data turned positive for the first time in six months. A nice November improvement would be well received.
Auto sales have been a relative weak spot in the economy as well. Strength in SUVs and trucks have been offset by weakness elsewhere. In addition, incentives have increased and auto credit quality has decreased, signs of a market that could become weaker. Part of this is the economy, of course. Part, however, may relate to demographic and lifestyle changes as well. A movement toward city centers mitigates the need to own a car (or cars). Millennials are less likely to own a car than previous generations and boomers entering retirement are becoming one-car families rather than two.
As for Friday’s employment report, the monthly job gains have been surprisingly robust of late, in part due to declines in productivity. That is both good and bad news. Given weakness in investment spending and strength in consumer confidence, the trends suggest another solid month of job creation. Auto strikes might create some confusion in the numbers. Gains in November may not be quite as robust as the headline figures might suggest.
Over the weekend, there has been a stream of conflicting data. On the positive side, as noted earlier, Chinese manufacturing appears to be recovering. In Germany, weekend elections indicate increasing support for the Green Party. Leaders of the Green Party are more likely to spend money and employ an expansive fiscal policy. One of the big headwinds to European growth is German behavior that is always reticent to spend.
On the flip side, President Trump this morning tweeted that he would reimpose 25% tariffs on imported steel and aluminum from Brazil and Argentina in response to what he claims is ongoing currency manipulation on the parts of both countries to weaken their respective currencies. Brazil’s economy has been improving. Argentina’s remains in permanent chaos. Brazil is the second largest exporter of steel to the U.S. Argentina is almost a non-event. Futures dropped sharply when the new tariffs were announced but quickly recovered based on all the other positive data.
Bond yields also made a strong overnight move higher in response to the good economic data. The 10-year Treasury picked up 7 basis points and now trades to a 1.84% yield.
Looking forward, December is generally a good month for stocks, especially at the end of a good year. There are two reasons. First, one can assume that a good year is paired with economic optimism. That seems to be the case today, although I wouldn’t rate the consensus outlook as robust. Rather, more of the same would be a fitting conclusion. But more of the same suggests a continuation of what we have seen for the past 10 years. That isn’t so bad. Second, in a year of broad gains in equity prices, taxable investors may choose to defer realizing those gains until after the New Year. In addition, the level of hedge fund liquidations this year should be less than last year, suggesting a decline in forced year-end liquidations. A final tailwind, at least through Christmas, will be the continuation of stock buyback programs by most major U.S. corporations.
Thus, while one can easily make an argument that valuations are full if not elevated, the path of least resistance continues to be for higher prices. More buyers than sellers are nice to see, at least in the short run. Economically, there isn’t a lot to fear at the short run. I can’t see the consumers suddenly hibernating. There are two dates to watch. The most important is December 15. That is the date the next round of Chinese tariffs is due to go into effect. Virtually no one believes that will happen, but in the chaotic world of Trump, nothing can be assumed with certainty. Second, is December 21, when the government might shutdown. The odds of that happening are probably even less than the odds of new higher tariffs on Chinese goods. Who wants to shut the government down 4 days before Christmas? I doubt anything will get settled by then, but most likely there will be another short 30-60 day extension. Might we see another fight in January surrounding border wall funding? It’s possible but the President didn’t win last year’s battle, and I don’t see him getting a big boost in funding this time around either. Ultimately, it will be a better campaign issue than a funding debate.
Today, Aaron Rodgers is 36. Britney Spears is 38. Lucy Liu turns 51.
James M. Meyer, CFA 610-260-2220