Investment Commentary – December 11, 2019

Year to Date Market Indices as of Market Close December 11, 2019
• Dow 27,854 (19.36%)
• S&P 3,136 (25.14%)
• NASDAQ 8,633 (30.12%)
• Gold $1,477 (14.95%)
• ilL $58.44 (27.64%)
• Barclay Bond Aggregate (8.68%)
• All World Index (20.13%)
• Fed Funds Rate 1.75 (Three -0.25 rate cuts in 2019)
• US Real GDP Growth 2.1 Q3/2019 (Up from 2.0 in Q2)

There’s a huge change coming from the Fed (just not today)

There’s a huge change coming from the Fed (just not today) The Federal Reserve is going to announce its latest interest-rate decision on Wednesday, and how the central bank describes its thinking is likely to drive market direction, unless there is a major development on the U.S.-China trade front.

But the really big news coming from the Fed is likely to be delivered in January, and it will have an impact longer than just a day. All year the central bank has been undertaking a policy review that is likely to culminate in a policy shift.

Lena Komileva, chief economist at G-Plus Economics, in the call of the day forecasts the Fed will shift from targeting inflation of 2% over the “medium term” to doing so over an average of the business cycle. Inflation in the current recovery, as measured by the personal consumption expenditure price index, has averaged just 1.5%.

“A resetting of the Fed’s inflation target implies that the Fed would be prepared to let labor markets run hot for a while and tolerate an inflation overshoot for a number of years, in effect ensuring that U.S. yields remain comfortably below nominal GDP levels for the foreseeable future,” he says.

That said, Komileva does say the market is overpricing the risk of a rate cut next year, even with a more dovish Fed. “The potential for a bearish re-steepening of the yield curve remains high, especially as equity markets are buoyant, the U.S. consumer remains resilient and the global industrial down-cycle plateaus. This appears to assume a very pessimistic outlook for U.S. political risk and U.S.-China trading relations heading into the 2020 U.S. presidential elections,” she says.

Stocks seek direction ahead of Fed rate decision

Stocks opened mixed Wednesday as investors await the latest interest rate decision from the Federal Reserve.

The Fed is expected to hold its fed funds rate in a range between 1.5 percent and 1.75 percent at the conclusion of its two-day meeting. The central bank lowered its benchmark rate three times since July to try to cushion the U.S. economy against a slowdown in global growth.

Boeing was weaker after Federal Aviation Administration head Steve Dickson said in a CNBC interview that the 737 Max will remain grounded into 2020.

Peloton shares were under pressure for a second day after the research firm Citron Research, which is run by the short-seller Andrew Left, said shares would fall 85 percent over the next year to $5 apiece.

Looking at earnings, GameStop plunged after weak demand for video-game consoles and software led to a 23.2 percent drop in comparable-store sales. The video-game retailer posted a loss of $415.3 million, or 49 cents a share, versus expectations for an 11 cent gain.

American Eagle Outfitters fell after forecasting its fourth-quarter profit below Wall Street expectations. The retailer reported better-than-expected earnings and sales.

On Thursday, Democrats in the U.S. House of Representatives and the White House announced a revised trade deal with Mexico and Canada. The deal would replace the North American Free Trade Agreement and would offer more provisions for U.S. workers.

Around the web:

Jobs momentum: The latest U.S. employment report beat expectations, providing further evidence that recent recession fears may have been unwarranted. Stocks rallied on Friday after the government reported that the economy generated 266,000 new jobs in November and the unemployment rate slipped to 3.5%.

Trade deadline: Markets remained sensitive to global trade news, as stocks tumbled on Tuesday after U.S. President Donald Trump said he had no deadline for reaching an initial trade accord with China, and that he was open to waiting until after the November 2020 U.S. election. The next round of U.S. tariff increases on Chinese imports was scheduled to take effect on December 15.

Fed ahead: On the heels of a strong monthly jobs report, the U.S. Federal Reserve is expected to keep interest rates unchanged when it concludes a meeting on Wednesday. That would mark a departure from the Fed’s recent policy easing; in October, the Fed cut rates for the third time in three months.

Sound and fury: Stocks made big daily moves, but the major U.S. indexes finished the week little changed overall as the Dow and the NASDAQ slipped about one-tenth of a percentage point and the S&P 500 rose slightly. Market declines on Monday and Tuesday were offset by rallies on Wednesday and Friday.

Retail strength: The holiday shopping season got off to a strong start. A trade group, the National Retail Federation, estimated that American shoppers increased their spending by 16% compared with last year over the five-day period between Thanksgiving and Cyber Monday.

U.K. election: Great Britain’s pound climbed to its highest level in seven months against the U.S. dollar as opinion polls indicated growing support for Prime Minister Boris Johnson’s Conservative Party heading into a December 12 election. Such an outcome could ease uncertainty about Brexit, the United Kingdom’s withdrawal from the European Union.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.