Monthly Brief January 2020 – Can the Consumer Keep Up
Through mid-January the new year had looked to be a continuation of 2019’s bull market as the much discussed economic “soft patch” appeared to have finally run its course. Investors’ focus on signs of improving global economic conditions, combined with continued support from global central banks, helped move equity markets higher. Bond markets were also in step with the improving sentiment as rates moved higher, also acknowledging a belief in improving global growth.
Those concerned about the outsized stock market gains during 2019 worried about a market that had advanced too far, too fast given the many geo-political risks that still existed. Yet, there began to be an acknowledgment that with the anticipation of healthy 2019 earnings reports, stock valuations were not stretched by historic standards, further supporting improving economic and business conditions and the potential for further market gains. But, despite the growing optimism, it was the unexpected news of the coronavirus and its spreading from a local problem to a global concern that caused equity markets to reverse course and move lower through late January.
As awareness of the coronavirus began to grow, its market impact grew even before it was known to what degree the virus had spread beyond China. Given the importance of China in the global economy, attempts to contain the virus’ impact were closely watched and once confirmed cases began growing across the globe, markets reacted with an outsized pullback to end the month.
It would be expected that it will take some time to fully understand the true economic impact of this global health concern. And investor sentiment may be fickle as the outlook for containing this outbreak may fluctuate. (Further tested by the amount of misinformation online, e.g., Google Trends shows a spike in searches for the “Corona beer virus” – hmm…) It is likely that investors will need to see signs of slowing in the rate of new cases before turning attention back to earnings and the economy.
CHART OF INTEREST – Can the Consumer Keep Up
For some time now several issues have plagued corporate America. With uncertainty regarding global trade and politics, the corporate sector has navigated a tenuous environment, necessarily requiring a cautious approach to growth plans. Global trade activity and new capital investment have lagged what otherwise may have been expected to be a robust economic period given the support of the generous policies among global central banks. While avoiding recession to date, the corporate sector continues to be vigilant.
But in the US, the consumer has picked up the slack, supporting continued economic growth. Certainly, this has been led by a strong job market accompanied by continued wage gains, setting the stage for continued economic contributions from spending. Going forward, investors will be gauging any potential changes to this dynamic and if/how other economic sectors may be able to pick up any slowing in the consumer’s participation.
The accompanying chart shows that wage gains have been moderating. While the month-over-month gains have been inconsistent, the trend (evidenced by the twelve-month moving average of the monthly gains) has been moderating since mid-2018. How this trend plays out in the coming months will provide some insight into future expectations. While not yet a concern, the message here is that the consumer is looking to be in need of help from the corporate sector to keep the US economy moving in the right direction.
James Ferrin, CFA
Chief Investment Officer
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