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              Weekly Market Update (December 2 – December 6, 2019)

              By Nela Richardson December 06, 2019

              Economic fundamentals stole the spotlight from trade-deal expectations last week, driving global stocks higher. International stocks outperformed domestic on the back of the fourth straight month of improvement in global manufacturing PMI, a proxy for global growth. The surveys are consistent with a still soft but improving demand environment, which suggests to us that the manufacturing downcycle may have run its course. U.S. stocks had their best daily gain in over a month on Friday following the November jobs report, which showed strong job gains, rising wages, and a return to a 50-year-low unemployment rate. This, combined with a seven-month high in consumer sentiment, provides further evidence that the U.S. economy finishes the year on solid footing.

              A Case for (Cautious) Optimism for Markets in December

              The market, in the first week of December, made a strong case for being optimistic that the bull market continues, with stocks rising 0.9% on Friday. What a difference a year makes! In contrast, the first week of December 2018 started off much rockier. Stocks slumped as a section of the yield curve inverted, unnerving investors with recession worries. Adding to market woes, last year the November jobs market missed expectations, and trade negotiations, which had been promising, started to unravel. That first week proved prescient – later that month stocks slid almost 20% to near bear-market territory.

              This week has shaped up to be altogether different from last year. With recession fears at bay for now, there is reason for cautious optimism ahead.

              • Though risks remain, the economy looks resilient. Last week started shaky as a key indicator of U.S. manufacturing, the Institute for Supply Management Index (ISM) stumbled further into contraction territory for the fourth straight month to a near decade-low level. This is not the first time we’ve seen persistent weakness in manufacturing during the current expansion. In fact, this measure fell for five straight months in 2015, without triggering a larger downturn. By Friday, new data on the labor markets and a glowing report on consumer sentiment underscored the overall health of the U.S. economy and rallied equities to close at a fresh high. Job growth in November soared to 266,000 jobs created from just 128,000 jobs in October. Also heartening was that the decline in manufacturing jobs reversed last month, with 54,000 manufacturing jobs added verses a decline of 43,000 the previous month. The November unemployment rate edged down to 3.5% (remaining at half-century lows). In contrast to the forceful job increases, wage growth was subdued for the month. Wages over the last 12 months have grown 3.1%, short of their 50-year historical average of 4%1. Therefore, wage pressure on corporate earnings is still low, and the risk of an inflation spike from wage increases in the near term is unlikely.?
                • Reason for caution: We expect job gains to level off in coming months as the pace of economic growth slows to below the average for the 10-year expansion. As long a job gains average more than 100,000 on a monthly basis, that is enough to absorb new entrants, in our view, and keep the labor market a pillar of strength for the consumer.?
              • Interest rates likely to stay at low levels. Last December the Federal Reserve increased benchmark interest rates to 2.5%, the highest level of the expansion. Additionally, the 10-year yield, a key reference rate to consumer-lending products like auto loans and mortgages, was around 3%, a full percentage point higher than the current level. Next week, the Fed again meets to announce its rate policy after lowering the federal funds rates three times in 2019 to between 1.5 – 1.75%. In this last Fed meeting of the year, markets are more likely to expect the Fed to lower benchmark rates than to raise them. We think that the most likely outcome is that the Fed keeps interest rates at their current low levels. That is good news for share-price growth to continue. Historically, rate hikes by the Fed have been a leading cause of a bull market ending. With real rates (adjusting for inflation) now near zero, they are close to the levels they were during most of the current expansion from 2009-2017. Therefore, monetary policy is providing stimulus for consumers and businesses that we think will help prop up spending in the holiday season and through the new year.?
                • Reason for caution: Coordinated central-bank stimulus has helped rally stocks and bonds this year. We don’t expect this strong bond performance to continue, with rates already at low levels. Moreover, investors should prepare for interest rates to rise modestly ahead, as the economy continues to grow and inflation likely picks up. Still, we think that long-term rates will remain under 3% for some time to come.?
              • A correction is normal. Last December investor anxiety turned to queasiness as the market ended the year 7.9% lower than where it began (after tumbling almost 20% late in the month). It is understandable, therefore, for investors to wonder if we will again see a correction this month. While we are not anticipating such a dramatic market decline this month as last year, it is important to note that corrections are normal, even during bull markets. Over the last 100 years the Dow has declined by at least 10% on average once a year2. We have not yet seen this large of a downswing in the market this year; however, we expect volatility to increase and remain at normal levels as the bull market ages.?
                • Reason for caution: Looking ahead to this week, the markets are eagerly awaiting two key events: the next rate announcement by the Federal Reserve, and whether or not an interim trade deal between the U.S. and China is completed before the onset of another round of tariffs on $156 billion in Chinese goods, scheduled for December 15. As the deadline for new tariffs approaches, expect more pronounced market fluctuations as investors try to digest new information on trade progress.

              The key to investing over the long term is not removing risk and uncertainty but managing it. Market optimism can come and go. Keeping a long-term perspective, a well-diversified portfolio, and the appropriate mix of equities and bonds for?your comfort with risk will help?you stay focused on the fundamental drivers of portfolio returns over time, rather than short-lived market moves.

              Sources: 1. FactSet, 2. Ned Davis Research

              Nela Richardson, PhD
              Investment Strategist

              Index Close Week YTD
              Dow Jones Industrial Average 28,015 -0.1% 20.1%
              S&P 500 Index 3,146 0.2% 25.5%
              NASDAQ 8,657



              MSCI EAFE 1,970 -0.2% 14.5%
              10-yr Treasury Yield 1.84% 0.06% -0.84%
              Oil ($/bbl) $59.09 7.1% 30.1%


              $112.52 -0.1% 8.4%

              Source: Morningstar, 12/06/19.? Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.?

              The Week Ahead

              Important economic data being released include the NFIB small business optimism index on Tuesday, consumer inflation on Wednesday, and November retail sales on Friday. The Federal Reserve is expected to leave its policy rate unchanged when it meets on Wednesday.

              Review last week's weekly market update.

              Important Information

              The Weekly Market Update is published every Friday, after U.S. markets close.

              The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.

              All content of the Dow Jones Indexes ? 2017 is proprietary to Dow Jones & Company, Inc.

              The Dow Jones, S&P 500 and Barclays Aggregate Bond Indexes are unmanaged and are not meant to depict an actual investment.

              Past performance does not guarantee future results.

              Diversification does not guarantee a profit or protect against loss.

              Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

              Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

              This information is approved for use with the public.

              It is intended for informational purposes only.

              It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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