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  • Weekly Market Update (January 05 – January 10, 2020)

    By Craig Fehr January 13, 2020

    Major indexes closed near fresh all-time highs last week as the U.S. and Iran took a step back, avoiding further escalation in geopolitical tensions. Iran retaliated to the recent killing of its general by striking against U.S. military bases in Iraq, but there were no casualties, and the U.S. president softened his comments. As a result, oil declined 6% on the week, recording its worst weekly performance since July of 20191. On the economic front, the December jobs report marked a slowdown in job gains, but a moderation was expected following November's outsized job additions. Wage growth softened some; however, wages are still growing faster than consumer prices, supporting consumer confidence and spending.

    War and Wages: The Rally Rolls On

    1 and 1 equaled 29,000 last week. More specifically, one escalation in military tensions and one employment report added up to drive the Dow briefly above the 29,000 mark for the first time ever1. The stock market has picked up in 2020 where it left off in 2019, rising amid a confluence of political uncertainties and broadly positive economic conditions. This touches on three key issues that will likely shape the investment narrative this year: 1. Policy/political risks, 2. Domestic and global economic trends, and 3. The potential for this market rally to continue given 1 and 2.?

    1. War, what is it good for? Headlines and Google searches on "World War 3" spiked last week as the geopolitical climate shifted amid the escalating military conflict between the U.S. and Iran. Fortunately, tensions have simmered from a boil, but the issue is far from resolved, and thus, further knee-jerk market reactions should be anticipated. The foreign policy implications are still highly uncertain, but there are some key takeaways for investors:
      • No "all clear" - Markets dislike uncertainty, which is often the immediate outcome from events like this. We doubt clarity, or a resolution will emerge quickly, prompting ongoing fluctuations as the situation progresses. Barring a breakdown in diplomacy that produces larger-scale military engagement, we think the U.S/Iran conflict will drive daily volatility in the near term, not a more structural or sustained market downturn.
      • Escalating conflicts are not a reliable sell signal.? While headlines and uncertainty influence short-term moves, markets take direction from fundamentals, not foreign affairs, over broader periods. In terms of broader economic impact, this conflict with Iran is likely to show up in fluctuating oil prices more than global GDP. To that end, with the U.S. now a net exporter of crude and with oil consumption as a % of GDP currently at half the level it was in the '80s, the present conflict does not appear to be an imminent threat to the U.S. expansion.? For perspective, the table shows the immediate and longer-term performance of the market following some notable past conflicts or military events.


    Initial Impact

    Market Return 1 Year Later

    Pearl Harbor ('41)



    Bay of Pigs invasion ('61)



    Cuban Missile Crisis ('62)



    Operation Desert Storm ('91)



    Saddam Hussein killed ('06)



    Osama bin Laden killed ('11)



    Syrian missile strike ('18)



    Saudi Oil pipeline bombing ('19)



    Source: Edward Jones, Bloomberg, Total return of the S&P 500 Index.

    1. Households are holding up – The market's antacid to swirling risks in recent years has consistently been the healthy U.S. consumer (and the support provided to economic growth). Last week brought fresh evidence that this dynamic is still intact. The December jobs report showed that payrolls rose by 145,000 in the month, sufficient to hold the unemployment rate at the half-century-low 3.5%, even as more people rejoined the labor force in pursuit of jobs. Here are the key implications for investors:
      • Consumer spending will keep the economy out of recession this year. We don't expect unemployment to go much lower from here, but December's figures signal that job gains can continue at a reasonable clip even as the stock of available workers remains tight. Employed, confident consumers should increase spending at a rate sufficient to offset weaker spots elsewhere in the economy, namely manufacturing and business spending.
      • Wage growth slowed, but that's not all bad – Year-over-year wage growth slowed slightly to 2.9%, the first time it's fallen below 3% in well over a year.? On one hand, that could ding the pace of household spending growth ahead, to the extent consumers don't offset that dip with loans or savings. On the other hand, wage growth remains modest in the context of historically tight labor-market conditions. We think this will have the silver lining of preventing a material acceleration in inflation and/or significant downward pressure on corporate profit margins (labor is the largest expense for most U.S. businesses). This is the longest economic expansion in U.S. history, in part because the economy hasn't overheated and produced inflation that required the Fed to undercut growth. A scenario of 100,000-plus job gains each month, continued low unemployment, and wage growth that doesn't put significant upward pressure on inflation is a scenario that, in our view, could persist in 2020 and would not knock the economy or market off their glidepaths.?
    2. Onward and upward – In our view, the foundation of the bull market is sound – the economy is growing, corporate profits are up, and interest rates are supportively low. But as sentiment has shifted to be notably more positive in the wake of the phase 1 U.S./China trade deal and the fading fears from last autumn's recession panic, momentum has seemed to put a bit of additional wind at the back of the market's recent leg up. In our view, market valuations are full and complacency has risen (for example, the market rallied more on the receding tensions with Iran than it fell when the conflict originally arose). This doesn’t have to signal impending doom, but it does suggest to us that stocks are more vulnerable to short-term disappointments.??
      • Too far too fast? – The stock market has risen 13% since October 81. Moreover, since then there have only been four days in which the market fell by more than 0.5%, demonstrating the steadiness of this rally1. Our investment approach is rooted in a longer-term focus on fundamental trends that history has shown have been powerful influences on performance. By that vein, we wouldn't argue with the fact that the stock market has logged strong gains because we have maintained our positive market stance for several years now based on our fundamental outlook. That said, even the best markets catch their breath periodically. We don't anticipate a severe pullback or the market to erase its gains, but we think it's prudent for investors to position expectations for a bumpier road ahead. If the rally has pushed your portfolio into an overweight allocation to stocks, consider a proactive rebalancing strategy to trim back to your target equity allocation.
      • Put your returns in perspective – Late 2018's sell-off and the more recent rally have produced prolific gains over the past year, with the S&P 500 returning 31% for the 2019 calendar year. Remember1:
        • Your investment goals are not one year long nor are they designed around the calendar. As you evaluate your portfolio, keep in mind that your portfolio is aligned to the timeline of your goals.?
        • You're not simply trying to maintain pace with or beat the Dow or S&P 500. Looking over the past five years, the stock market has delivered an average return of 11% per year, which is more reasonable but still a higher annual return than we anticipate over the next five years1.
        • Further, by diversifying into bonds and other asset classes, you can reduce the swings and potential downside in your portfolio, but you should measure your progress against the long-term performance your portfolio was designed to achieve, not the shorter-term performance of a particular index.??

    Craig Fehr, CFA
    Investment Strategist

    Sources: 1. Bloomberg

    Index Close Week YTD
    Dow Jones Industrial Average 28,824 0.7% 1.0%
    S&P 500 Index 3,265 0.9% 1.1%
    NASDAQ 9,179



    MSCI EAFE* 2,040.49 -0.1% 0.2%
    10-yr Treasury Yield 1.82% 0.0% -0.1%
    Oil ($/bbl) $59.14 -6.2% -3.1%


    $112.98 0.0% 0.4%

    Source: FactSet, 01/10/20.?*5-day performance ending Friday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.?

    The Week Ahead

    The earnings season unofficially kicks off this week, with major U.S. banks reporting fourth-quarter results. Also, the U.S./China "phase one" trade deal is expected to be signed this week. Important economic data being released include inflation on Tuesday, retail sales on Thursday, and industrial production on Friday.

    Review last week's weekly market update.

    Important Information

    The Weekly Market Update is published every Friday, after market close.

    Market indexes are unmanaged and cannot be invested into directly 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.

    Dividends may be increased, decreased or eliminated at any time without notice.

    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.

    The content of this report is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

    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.

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