Stocks fell Friday after a tepid employment report. But, as I have noted often, considering monthly changes can vary wildly, looking at 3-month averages usually gives a better picture. While the December gains were a bit below consensus expectations, November numbers were much better than expected. The three-month average, just shy of 185,000, is fine and the 3.5% unemployment rate, unchanged from November should give investors a solid foundation to remain positive.
This week earnings for Q4 will begin to be reported starting with the big banks and brokerages. As always, it will be the market’s reaction to earnings that will matter the most rather than absolute results. This is a week of hints; the bulk of reports will begin next week. Obviously, based on the gains overall, investors continue to seem optimistic.
One of the signs of a tired advance is when leadership gets more concentrated in fewer and fewer names. Apple#, Alphabet# and Facebook# have been recent leaders but the gains are not universal. While recently, several groups including energy, banking and selected industrial and health care issues have bounced significantly broadening leadership, that seems to have ended in the past two weeks. This is not healthy for the market. For an advance to continue we will need to see a broadening of leadership once again. Apple and Alphabet can’t do it alone.
Does that mean a correction is finally imminent? Not at all. But it does indicate that the seeds of one are there if market leadership concentrates into fewer and fewer names.
With that said, the economic backdrop remains solid. Economic prospects are improving and interest rates remain subdued. The dollar is essentially a non-event for most companies after being a headwind for most multinationals for over a year. Corporate profits should begin to reaccelerate in 2020. That suggests any correction, should it occur, should be limited.
We are beginning to approach primary season where some sort of real elections will replace public polls. I won’t hazard a guess at this point in time, but clearly the next 90 days will go a long way toward defining the Democratic nominee. That person may not be completely clear in 90 days, but the candidates will certainly be narrowed down to a few. Wall Street, as measured by stock market reaction, so far has not factored the probability that a major progressive candidate will win and be successful in dramatically changing either the tax code or growth path. So far, there has been no reason to do so. U. S. history to date has not shown any acceptance of radical economic change. There is always a next time, and that remains a risk, but not a high one in our view.
In the meantime, it remains all about earnings and interest rates. We will learn a lot more as Q4 earnings are reported over the next several weeks, but there are few signs so far that earnings won’t meet expectations or that economic futures will deteriorate. It is probably also safe to presume that the President isn’t going to accelerate trade wars meaningfully in an election year. Chinese officials are due to come to Washington this week to sign a Phase I deal. It won’t be much, but Mr. Trump will clearly play this up as much as he can. Phase II and beyond are most likely 2021 events if they happen at all. Indeed, politically and legislatively, 2020 will be a non-event and that plays into President Trump’s hand as long as growth remains 2% or higher, inflation stays low, and unemployment remains close to 3.5%. That is Nirvana for investors.
Today, Orlando Bloom is 43. Patrick Dempsey turns 54.
James M. Meyer, CFA 610-260-2220