Stocks continued their listless pattern on Friday. Most averages experienced modest declines last week. About the only news of importance was trade talk chatter suggesting that even a small Phase I deal won’t be completed before December 15. That increases the odds that another round of tariffs gets implemented.
On the economic front, the data was also a bit weaker than expected. Perhaps the most important number was the weekly jobless claims which were virtually unchanged week-over-week after a climb the week before. Ever so slowly this number is creeping higher. I wouldn’t put it anywhere near red flag territory yet, but the history of jobless claims is that when it starts to rise, all of a sudden it shoots up. Job postings have been falling for several months. Layoffs, however, remain very low. But, if another round of tariffs come, and companies start to feel margin pressure as we roll into the new year, it is possible (not yet a prediction, but a rising possibility) that claims will move up at a faster rate. If that happens, it would be a red flag warning that economic growth prospects would have to be reevaluated and the possibility of negative growth would rise.
Overall, the outlook for Q4, going into Christmas season, is one of very tepid growth, less than Q3 which hovered around 2%. But a strong consumer could turn that all around. That is why it is much too early to make a call either on Q4 or early 2020. What we can say, however, is that until the trade situation stabilizes, investment spending is likely to remain weak. Without investment spending, productivity is also likely to remain weak. That puts all the weight on supporting the economy on the consumer. So far, he has been a happy camper and spending has been strong. But that all leads back to the jobs picture. He will remain confident as long as our economy adds 150,000 jobs per months and weekly unemployment claims remain below 225,000. Should either of those two numbers weaken, i.e. new jobs fall to or below 100,000 or jobless claims rise above 230,000, then ongoing growth and rising profits come into question.
So far, those are all ifs. It does make December 15, the day the next tranche of tariffs is due to go into effect, so important. There are many reasons to expect that they will get deferred. It doesn’t seem logical for the President to raise tariffs 10 days before Christmas. But China has been stonewalling the U.S. since trade talks began, and the President has nothing to show for his “tough” stance taken to date. Trump make not want to raise tariffs again in December and he knows the possible election consequences if they stay in place for too long. But he also isn’t a man who likes to lose a competitive fight. So far, China hasn’t bought an extra soybean much less changed its behavior one iota. China has its own economic problems and has a rising crisis in Hong Kong to deal with. It doesn’t want to see another layer of tariffs either. Thus, most observers and the market still assume some rabbit will be pulled out of the hat at the last minute. We shall see.
As for the markets, they continue to drift higher. Given the strength of equity markets this year, I think the upward slope is more a function of an absence of sellers than a surge in buyers. Right at the moment, there is no strong reason to sell. Valuation may be a little rich but taxable investors would rather hang on and sell after the New Year to defer profits into 2020. The losers of 2019 will be sell candidates but there are few stocks down significantly this year. Indeed, except for companies with truly terrible fundamentals, much of the tax selling pressure may have lifted at the end of the mutual fund fiscal year at the conclusion of October. That doesn’t, however, suggest complacency. After a strong 2017, stocks continued to rally for another month before hitting a brick wall in February 2018 when equities declined by 10% in just six trading sessions. History never repeats exactly but it often rhymes. The lesson of the February 2018 swoon is that overstaying in late 2017 and early 2018 saw gains of the last few months evaporate quickly. Therefore, be mindful of valuation, don’t chase, and where appropriate, take a few profits.
I see nothing near term short of a surprisingly good trade deal, that should send stocks sharply higher. Weaker economic data, or another round of tariffs won’t be accepted well on Wall Street. Hang in if you choose but stay to your asset allocation. I will end noting that asset reallocation is stronger around year end than at any other time of the year.
Today, Christina Applegate is 48.
James M. Meyer, CFA 610-260-2220