In this Q4 recap: Equities maintain their momentum to close out a strong year on Wall Street, helped by a slight thaw in the U.S.-China trade dispute and some better-than-expected domestic economic data.

Quarterly Economic Update

A review of Q4 2019, Presented by Marc Aarons at Money Managers, Inc.

THE QUARTER IN BRIEF
Movement in U.S.-China trade negotiations, an accommodative Federal Reserve, evidence of decent economic growth – all this brought some fourth-quarter tailwinds to Wall Street. The S&P 500 advanced 8.53% in the final three months of the year. Foreign stock markets also posted Q4 gains, and some clarity emerged regarding the Brexit. Gold and oil both posted Q4 gains. Home buying tapered off. As the quarter ended, a new federal law was passed, affecting both retirement savers and retirees.¹

DOMESTIC ECONOMIC HEALTH
In the fourth quarter, traders reacted to even the tiniest bits of news concerning U.S.-China trade relations. New 15% tariffs were scheduled for select Chinese imports on December 15. Those tariffs were never implemented, for on December 13, Chinese and U.S. officials announced an agreement on a preliminary trade pact. In this “phase-one” deal, to be signed in Washington this month, the U.S. agrees to phase out existing tariffs on Chinese products, and China agrees to buy more U.S. crops. The phase-one deal also made a start in addressing the most pressing issue in Sino-American trade relations: the protection of U.S. intellectual property in China.²

The Federal Reserve made its third interest rate cut of the year in October – the third cut in three meetings. Then, it signaled that it may not adjust short-term interest rates for all of 2020. In December, the central bank’s newest dot-plot (a chart used to convey the benchmark interest rate outlook for coming quarters) showed that none of the 17 members of the Federal Open Market Committee expected a rate cut in 2020, and only four anticipated any kind of rate hike. Currently, the target range for the federal funds rate is 1.50-1.75%.³

In terms of economic indicators, the fall increase in hiring was surprising news for labor market analysts. The Department of Labor said that employers added 156,000 net new jobs in October; then, 266,000 in November. These numbers hinted at an economy picking up rather than slowing down. Unemployment was at 3.6% in October, declining to 3.5% in November. The broader U-6 unemployment rate (which counts the underemployed as well as the unemployed) was at 7.0% in October and 6.9% a month later.⁴

Consumer spending, according to the Department of Commerce, rose by 0.4% in November, improving on an October increase of 0.3%. Through November, retail sales were up 3.5% year-over-year, with respective October and November gains of 0.4% and 0.2%. During Q4, the Bureau of Economic Analysis revised its Q3 gross domestic product estimate up from 2.0% to 2.1%.⁴

Households maintained their optimism; however, in December, the Conference Board’s Consumer Confidence Index recorded its fourth decline in five months. With revisions factored in, the index went from 126.1 in October to 126.8 in November to 126.5 in December. The University of Michigan’s consumer sentiment gauge, on the other hand, had its best reading since May in December, rising to 99.3. It rose in each month of Q4, ascending to 95.5 in October and 96.8 in November.^5,6

Inflation picked up in the fourth quarter; the Consumer Price Index rose 2.1% in the 12 months ending in November, 0.3% higher than the annualized inflation seen a month earlier. The core CPI (which factors out energy and food costs) was up 2.3% year-over-year in November.⁴

Manufacturing seemed to stand out as the U.S. economic weak spot in Q4. The Institute for Supply Management’s Factory Purchasing Managers Index was below 50 for the whole quarter (indicating an economic sector that is shrinking). The December reading of 47.2 was the poorest since June 2009. ISM’s PMI for the larger service sector of the economy was above 50 in both October and November (54.7, and then 53.9).^4,7

The quarter also saw the passage of the Setting Up Every Community for Retirement Enhancement (SECURE) Act, a major piece of legislation impacting traditional retirement accounts. Under the SECURE Act, the age for required minimum distributions (RMDs) from these accounts rises from 70½ to 72. (This change affects only those who turn 70½ in 2020 or later.) The SECURE Act also lets seniors with earned income keep contributing to these accounts after age 70.^4,8

GLOBAL ECONOMIC HEALTH
The IHS Markit Purchasing Managers Index (PMIs) for the eurozone factory sector was at 46.3 in December; a number below 50 indicates a sector in which activity is contracting. Seven of eight countries measured by this index saw manufacturing weaken further in December; Germany’s factory sector was in the poorest shape by the end of the quarter, according to Markit’s data summary. Factory sectors in Italy and the Netherlands showed their most dramatic monthly contraction since 2013 in December.⁹

The Caixin China General Manufacturing PMI for China was at 51.5 by December, down a bit from 51.8 in November. The rate of new Chinese factory orders declined in Q4, but there was a small gain for export orders. China’s state factory PMI had a poorer reading of 50.2 in both November and December. As Q4 ended, China’s government announced it would reduce cash reserve requirements for the nation’s banks, which would effectively pour another 800 billion yuan into China’s financial system.^9,10

While the quarter opened with much uncertainty about when (and even if) the Brexit would occur, some of this ambiguity was resolved by the end of the year. The Conservative (Tory) Party won a decisive victory in December’s United Kingdom general election, and Boris Johnson remained Prime Minister. As a consequence, the Brexit may occur by the extended January 31 deadline set by the European Union, as Johnson and the Conservatives appear to have the votes needed to approve a revised Brexit deal. Their next task: forging a working trade pact with the European Union before 2020 ends.¹¹

WORLD MARKETS
Gains far outnumbered losses last quarter. The largest advances were made by emerging-market benchmarks: Argentina’s Merval jumped 43.36%, Russia’s RTS rose 16.12%, and Brazil’s Bovespa climbed 10.41%. In the Asia-Pacific region, there were three improvements worth mentioning: Japan’s Nikkei 225 gained 8.74%; China’s Shanghai Composite, 4.99%; South Korea’s Kospi, 6.53%. France’s leading stock index, the CAC 40, gained 5.29%; Germany’s benchmark, the DAX, added 6.61%.¹²

In the midst of all this, a couple of stock indices failed to advance. Thailand’s Set50 index slipped 2.00% in the quarter, and Australia’s ASX 200 benchmark went sideways, losing 0.06%.¹²

COMMODITIES MARKETS
What were the best-performing commodities of the quarter? Well, there were several gains of 10% or more, and at the top of the list, there is coffee, which rose 23.88% on the Intercontinental Exchange (ICE) in Q4. Soybean oil advanced 17.67%; palladium, 16.56%; WTI crude oil, 14.70%. RBOB gasoline gained 12.23%; wheat, 11.19%. WTI crude ended the quarter trading at $61.18 a barrel. Gold rose 3.41% in Q4, with the price hitting $1,523.10 on the New York Mercantile Exchange (NYMEX) on December 31.^13,14

Some other futures took Q4 losses. Natural gas fell 15.69% for the quarter, and Q4 brought setbacks of 5.36% for orange juice, 2.94% for corn, and 2.45% for the U.S. Dollar Index, which ended the year at 96.16.¹³

REAL ESTATE
When Freddie Mac conducted its last Primary Mortgage Market Survey of the decade (December 26), it measured the average interest rate on a 30-year conventional mortgage at 3.74%, and the mean interest rate for a 15-year conventional mortgage was at 3.19%. Three months earlier (September 26), the average interest on the 30-year home loan was at 3.64%, while the average interest on the 15-year loan was at 3.16%.¹⁵

30-year and 15-year fixed rate mortgages are conventional home loans generally featuring a limit of $484,350 ($726,525 in high-cost areas) that meet the lending requirements of Fannie Mae and Freddie Mac, but they are not mortgages guaranteed or insured by any government agency. Private mortgage insurance, or PMI, is required for any conventional loan with less than a 20% down payment.

The pace of home buying decelerated during the fall. National Association of Realtors’ reports showed residential resales down 1.5% in October and 1.7% in November. Still, sales were up 2.7% year-over-year. By November, the median sale price of an existing home was $271,300, a 5.4% increase from November 2018. The NAR said that there was less than four months of existing home inventory in both October and November; it views six months of inventory as a sign of a balanced market.^4,16

New home sales, by the estimation of the Census Bureau, fell 2.7% in October, but bounced back with a 1.3% gain a month later. Groundbreaking on new housing developments had definitely picked up from 2018. Federal government data showed housing starts up 13.6% year-over-year in November, with permits for future construction up 11.1% year-over-year.^4,17

T I P   O F   T H E   Q U A R T E R
You may not want to abbreviate the year 2020 on financial, insurance, legal, and health care documents you sign or date. If you write “2/1/20” and there is enough space left after the “20,” an unscrupulous party could add a couple of numerals and change that date to 2/1/2018 or 2/1/2017, and so on.

 LOOKING BACK, LOOKING FORWARD

As the chart below reveals, the big Wall Street benchmarks surged in the fourth quarter. Their Q4 gains capped off one of the better years of the decade for domestic stocks. Both the Nasdaq Composite and S&P 500 had their best years since 2013. The quarter-ending settlements: Dow, 28,538.44; S&P, 3,230.78; Nasdaq, 8,972.60.^18,19

Sources: barchart.com, treasury.gov – 12/31/19^18,20,21

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year Treasury yield = projected return at maturity given expected inflation.

The opening quarter of 2020 got off to a bullish start, with a 330-point gain (and a new record close) for the Dow Industrials on January 2. With the phase-one U.S.-China trade deal slated to be signed and the economy not giving off distinct signals of slowing, traders entered the new quarter seeing some upside in the market. Questions are on the horizon, though. Can geopolitical tensions in the Middle East be managed? Will the next earnings season meet forecasts? While the market opened 2020 with a rally, there are certainly potential headwinds around.²²

Q U O T E   O F   T H E   Q U A R T E R

“Age is… wisdom, if one has lived one’s life properly.”

MIRIAM MAKEBA

 Marc Aarons may be reached at (714)887-8000 or Marc@OCMONEYMANAGERS.com

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Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)

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^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The RTS Index (Russia Trading System) is a free-float capitalization-weighted index of 50 Russian stocks traded on the Moscow Exchange, calculated in U.S. dollars. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a blue-chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The SET50 index is calculated from the prices of 50 selected SET (Stock Exchange of Thailand) stocks. The S&P/ASX 200 index is a market-capitalization weighted and float-adjusted stock market index of stocks listed on the Australian Securities Exchange. The index is maintained by Standard & Poor’s and is considered the benchmark for Australian equity performance. Intercontinental Exchange (ICE) is an American company that owns exchanges for financial and commodity markets, and operates 12 regulated exchanges and marketplaces. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.}

^{CITATIONS:
1 – us.spindices.com/indices/equity/sp-500 [12/31/19]
2 – cnbc.com/2019/12/13/china-says-it-has-agreed-to-us-trade-deal-text-indicates-next-step-is-signing.html [12/13/19]
3 – investors.com/news/economy/fed-meeting-dow-jones-reaction-3-big-questions/ [12/11/19]
4 – investing.com/economic-calendar [12/31/19]
5 – investing.com/economic-calendar/cb-consumer-confidence-48 [1/3/20]
6 – tradingeconomics.com/united-states/consumer-confidence [1/3/20]
7 – marketwatch.com/story/us-manufacturing-slumps-worsens-in-december-as-ism-index-falls-to-10-year-low-2020-01-03 [1/3/20]
8 – marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21 [12/25/19]
9 – nasdaq.com/articles/daily-markets%3A-2020-looks-to-begin-the-way-2019-ended-2020-01-02 [1/2/20]
10 – asiatimes.com/2020/01/article/china-slowing-caixin-purchasing-mgr-data-confirm/ [1/2/20]
11 – forbes.com/sites/pascaledavies/2019/12/15/for-europe-the-brexit-battle-is-just-getting-started [12/15/19]
12 – barchart.com/stocks/indices/world-indices?viewName=performance [12/31/19]
13 – barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [12/31/19]
14 – marketwatch.com/investing/future/gold [1/2/20]
15 – freddiemac.com/pmms/archive.html?year=2019 [1/2/20]
16 – marketwatch.com/story/existing-home-sales-fell-17-in-november-as-americans-struggled-to-find-affordable-properties-2019-12-19 [12/12/19]
17 – economy.com/united-states/residential-housing-starts [1/2/20]
18 – barchart.com/stocks/indices?viewName=performance [12/31/19]
19 – abcnews.go.com/Business/stocks-post-biggest-year-gain-2013/story?id=68008745 [12/31/19]                                                        
20 – barchart.com/stocks/indices?viewName=performance [9/30/19]
21 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll [12/31/19]
22 ­- cnbc.com/2020/01/02/dow-futures-point-to-a-higher-open.html [1/2/20]}

The post Quarterly Economic Update – January 2020 appeared first on Money Managers, Inc..

In this Q4 recap: waves of volatility hit Wall Street, trade pacts and disputes make headlines, oil takes a plunge, and the economy continues to perform well.

Quarterly Economic Update

A review of Q4 2018

Presented by Marc Aarons @Money Managers, Inc. 

THE QUARTER IN BRIEF

Wall Street saw many ups and downs in the last three months of 2018. The fourth quarter concluded with bulls and bears vying for control of the market and with the S&P 500 suffering a 13.97%, three-month loss. The Federal Reserve sent conflicting signals about its implementation of monetary policy normalization, to the frustration of investors. No real progress was made in resolving the U.S.-China trade war, and the Brexit appeared to reach a standstill. The price of oil dropped sharply. The housing market gained a bit of momentum as home prices and mortgage rates both declined. The quarter was quite newsworthy, but its major headlines raised some troubling questions about the direction of the markets.¹

DOMESTIC ECONOMIC HEALTH

On the whole, the economy looked quite good in the fall. Consumer spending increased 0.8% for October and 0.4% for November, with retail sales up 1.1% in the tenth month of the year and 0.2% in the eleventh. Retailers benefited from a great holiday sales season: on an annualized basis, consumer purchases made between November 1 and December 24 were up 5.1% compared to the same period in 2017.^2,3

Consumer confidence indices declined from strikingly high levels, but were still notably strong. The Conference Board index hit 137.9 in October, 136.4 in November, and 128.1 in December. Having its best year since 2000, the University of Michigan’s monthly consumer sentiment gauge came in at 98.6 for October, 97.5 for November, and 98.3 for December; it averaged 98.4 for 2018.^4,5

Both the service and factory sectors were booming, according to the Institute for Supply Management’s monthly purchasing manager indices. ISM’s non-manufacturing index was above 60 in both October and November (60.3, then 60.7); its manufacturing index rose from 57.7 in October to 59.3 in November.⁶

How was the jobs picture? Nonfarm payrolls expanded with 237,000 net new jobs during October; the November gain was 155,000. During both months, average yearly wage growth was at 3.1%. The main jobless rate held at 3.7%; the underemployment (U-6) rate moved north from 7.4% to 7.6%.^2,7

Inflation was advancing just 2.2% a year by November; the 12-month increase had approached 3% as recently as July. Falling fuel costs helped tame inflation pressure. As a result, the average non-supervisory worker saw his or her inflation-adjusted income rise 1.0% in the 12 months ending in November, the most since 2016. On the wholesale front, producer prices jumped 0.6% in October, but rose only 0.1% during November. (Speaking of producers, industrial production was up 3.9% year-over-year in November; overall durable goods orders rose 0.8% for November after a 4.3% fall during the prior month.)^2,8

In late December, the Bureau of Economic Analysis stated the economy had expanded 3.4% in the third quarter, revising its previous estimate of 3.5%. With growth like that, it not be surprising that the Federal Reserve made its fourth rate move of the year in December, taking the target range on the federal funds rate to 2.25-2.5%. Top Fed officials sounded alternately dovish and hawkish during the fourth quarter. In October, Fed chair Jerome Powell commented that interest rates were “a long way” from neutral, irritating Wall Street. A month later, both he and Fed vice chair Richard Clarida remarked that the benchmark interest rate was close to a “neutral” level. December’s rate increase came with a relatively hawkish dot-plot, projecting two more hikes in 2019.^2,9

The U.S. and China did little to address the tariffs they had imposed on each other earlier in the year. At the start of December, both nations did agree to a 90-day truce on introducing new import taxes. Even so, the U.S. was slated to hike tariffs on as much as $200 billion of Chinese imports as the year began.¹⁰

 GLOBAL ECONOMIC HEALTH

Overseas, manufacturing economies in the east and west seemed to be decelerating. In fact, December marked the eighth consecutive month of a downward trend in weighted average Markit flash PMI readings of U.S., Japan, and European Union member countries. The mean factory PMI reading among those nations was the poorest in two years last month. China’s economy slowed in each month of the quarter, according to a Bloomberg Economics tracker, which cited reduced consumer demand for goods and services as much as the impact of tariffs. In November, the nation’s official factory PMI sat at 50.0, the break-even point between sector growth and contraction. In Q3, China’s annualized gross domestic product was expanding at a 6.5% pace; in Q1, the annualized GDP reading had been at 6.8%.¹¹

The European Union (and the world) waited for the Brexit to proceed. U.K. leaders, however, spent the quarter debating if it should unfold according to the deal that Prime Minister Theresa May had presented to the European Union. By December, May’s deal faced almost certain rejection in Parliament. There were three other options: another national referendum on the Brexit, a no-deal Brexit that would leave big businesses with headaches, or a “managed,” no-deal Brexit with some bilateral trade arrangements put in place. The deadline for the Brexit was still set for March 29. On December 13, the European Central Bank confirmed that its longstanding, asset-purchase program would wrap up at the end of 2018. Interest rate hikes could be in the ECB’s plans this year; euro-area consumer prices have been rising only about 1% annually for the past six years. Real, annualized GDP for the euro area through the first three quarters of 2018 was just 1.2%, a pace far off the 2.7% GDP seen in 2017.^12,13

WORLD MARKETS

As bearish sentiment mounted in Q4, marquee equity indices steadily descended. Most of the 13-week declines were sizable: in the west, France’s CAC 40 slid 13.89%; Germany’s DAX, 13.80%; the United Kingdom’s FTSE 100, 10.41%. In the east, India’s Sensex lost just 0.44%; Hong Kong’s Hang Seng, 6.99%; Japan’s Nikkei 225, 17.02%; Australia’s All Ordinaries, 9.74%; China’s Shanghai Composite, 11.61%. To our north, the TSX Composite retreated 10.89% in Q4. MSCI’s Emerging Markets index fell 7.85% during the quarter; its World index tumbled 13.74%.^14,15

COMMODITIES MARKETS

While equities had a dismal quarter, some commodity futures posted significant Q4 gains. Take cocoa, which advanced 16.04%, and palladium, which rose 12.32%. Sugar improved 7.41% in Q4; gold, 6.61%; silver, 4.86%; soybeans, 2.68%; corn, 1.90%. The U.S. Dollar Index added 1.62%. At the closing bell on December 31, gold and silver were respectively worth $1,284.50 and $15.54 per ounce on the COMEX.^16,17

What notable commodities lost value in the quarter? Here is a list. Platinum fell 3.22%; coffee, 3.78%; wheat, 4.55%; natural gas, 4.70%; cotton, 6.59%; copper, 6.63%; RBOB gasoline, 37.41%; WTI crude, 37.54%. WTI crude ended Q4 at just $45.83 a barrel on the NYMEX.^16,17

REAL ESTATE

While the real estate market cooled off in 2018, the pace of home buying began to improve in the fourth quarter. By the estimations of the National Association of Realtors, existing home sales rose 1.4% in October and 1.9% in November. Perhaps sellers were lowering prices to meet prospective buyers on their turf. By November, NAR noted a median sale price of $257,700, which was merely 4.2% higher than in November 2017.^2,18

A dip in mortgage rates could also have been a factor. In the last Freddie Mac survey of 2018 (December 27), the average interest rate for a conventional home loan was 4.55% nationally; it had been 4.72% three months earlier. (Rates on 15-year, fixed loans and 5/1-year, adjustable loans were respectively at 4.01% and 4.00% in the December 27 survey, compared with 4.16% and 3.97% in late September.)¹⁹

Even so, NAR’s pending home sales index measuring monthly housing contract activity showed declines of 2.6% in October and 0.7% in November. New home purchases fell 8.9% in October. (We do not yet know about November new home sales, as the release of that Census Bureau report was delayed due to the federal government shutdown.)²

Home builders broke less ground in October, then started more projects (and took out more permits) in November. Census Bureau data showed housing starts down 1.6% for October, up 3.2% a month later; building permits were down 0.4% in the tenth month of the year, but up 5.0% in the eleventh.²

T I P   O F   T H E   Q U A R T E R
If you are within a few years of retiring, schedule a review of your retirement strategy. You do not want to risk basing your withdrawal rate or your investment selection on out-of-date assumptions.

 LOOKING BACK, LOOKING FORWARD

The fourth quarter is often hot for stocks, but this past one was ice cold. Equity investors grew concerned about the Federal Reserve’s plans for 2019, the evident economic deceleration in China and Europe, and a narrowing spread between long-term and short-term Treasury yields that risked becoming an inversion. The S&P 500 closed out 2018 at 2,506.85; the Dow Jones Industrial Average, at 23,327.46; the Nasdaq Composite, at 6,635.28; their quarterly performances are noted in the table below. The CBOE VIX volatility index surged 109.74% in the quarter to 25.42.^1,9

If you are wondering how the small caps fared, the short answer is: even worse than the big three. The S&P SmallCap 600 lost 20.43% in Q4; the Russell 2000, 19.39%.^1,20

Sources: barchart.com, wsj.com, bigcharts.com, treasury.gov – 12/31/18^1,21,22

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

The fourth quarter of 2018 was the poorest quarter on Wall Street in 11 years. Was the welcomed, large-cap rebound at the end of December a hint of better times ahead? Earnings season is about to start, and it might be just what the Street needs; before it begins, investors may tread cautiously. Wall Street cannot “resume normal programming” fast enough for some market participants, but the path toward stability may not be an easy one; the volatility seen in December may take weeks to moderate. In sum, 2019 presents investors with many more uncertainties than 2018 did, and patience will be required to contend with them. Patience, in fact, may be an investor’s greatest friend this quarter and year.²³

Q U O T E   O F   T H E   Q U A R T E R

“Time is the most valuable thing a man can spend.”

tHeOphrastus

 Marc Aarons may be reached at (714)887-8000 or Marc@OCMONEYMANAGERS.com

^{Know someone who could use information like this?
Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)}

^{MMI Disclosure}

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.}

^{CITATIONS:
1 – barchart.com/stocks/indices?viewName=performance [1/1/19] 2 – investing.com/economic-calendar/ [12/28/18] 3 – cbsnews.com/news/2018-holiday-sales-soar-to-6-year-high/ [12/20/18] 4 – investing.com/economic-calendar/cb-consumer-confidence-48 [12/27/18]
5 – tradingeconomics.com/united-states/consumer-confidence [12/27/18] 6 – instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?SSO=1 [12/6/18] 7 – bloomberg.com/news/articles/2018-12-07/u-s-payrolls-rise-below-forecast-155-000-as-wage-gain-misses [12/7/18] 8 – marketwatch.com/story/cheaper-gas-tamps-down-consumer-inflation-in-november-cpi-shows-2018-12-12 [12/12/18] 9 – forbes.com/sites/jjkinahan/2018/12/19/hawkish-now-dovish-later-fed-hikes-but-lowers-projected-2019-rate-projections [12/19/18] 10 – scmp.com/news/china/diplomacy/article/2179505/us-china-trade-war-timeline-first-tariffs-90-day-truce [12/26/18] 11 – bloomberg.com/news/articles/2018-12-27/december-early-indicators-show-china-slowed-for-a-seventh-month [12/27/18] 12 – nasdaq.com/article/british-ministers-split-over-next-brexit-steps-if-pms-deal-fails-20181220-00145 [12/20/18] 13 – tinyurl.com/ycbvf56h [12/28/18] 14 – news.morningstar.com/index/indexReturn.html [12/31/18] 15 – msci.com/end-of-day-data-search [12/31/18] 16 – barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [12/31/18] 17 – money.cnn.com/data/commodities/ [12/31/18] 18 – cleveland.com/business/2018/12/ohio-us-home-sales-down-in-november-from-last-years-levels.html [12/19/18] 19 – freddiemac.com/pmms/archive.html [1/1/19] 20 – money.cnn.com/data/markets/russell/?page=33 [1/1/19] 21 – quotes.wsj.com/index/SPX [9/28/18] 22 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll [12/31/18] 23 – cnbc.com/2018/12/31/stock-market-wall-street-stocks-eye-us-china-trade-talks.html [12/31/18]}

The post Quarterly Economic Update-A review of Q4 2018 appeared first on Money Managers, Inc..

In this Q2 recap: tariffs take center stage, U.S. data signals solid growth, oil gains 18.4%, and the S&P 500 rises nearly 3%.

A review of Q2 2018, Presented by Marc Aarons @ Money Managers, Inc.

THE QUARTER IN BRIEF
At the end of 2018, economists and journalists may look back on the second quarter and see the moment when a global trade war began. Whether one is truly underway or not, the fact is that Q2 was a good quarter for equities. The S&P 500 gained 2.93% in three months, and while the blue chips had their struggles, tech shares ascended once again. Many foreign benchmarks also had a good quarter, even as the Trump administration’s planned import taxes on U.S. trading partners drew tariffs in kind and bred pessimism overseas. Our labor market and manufacturing and service industries continued to look healthy, and consumer confidence and spending reports were largely encouraging. Existing home sales tailed off. Oil made quite a comeback, aided by supply concerns. It was a quarter in which relatively strong economic data was overshadowed by a shift in the playing field for global trade.¹

DOMESTIC ECONOMIC HEALTH
The Trump administration had begun imposing import taxes early in the year, but in the second quarter, the international tariff spat truly grew heated. U.S. duties against metals imported from Mexico, Canada, and European Union nations were met by 25% taxes levied by the E.U. on American jeans, bourbon, orange juice, and other products, and Canada, India, and Mexico announced duties on select imports from America as well. Then the U.S. supplemented its earlier tariffs with new 25% taxes on $34 billion of Chinese imports (set to take effect July 6), and threatened to impose further 10% duties on another $200 billion of Chinese products and a 20% tariff on autos coming out of the E.U. China replied to the new tariff on $34 billion of its exports with an equal tariff on U.S. goods, to be implemented July 6.²
Interest rates moved north in Q2. The Federal Reserve made its second rate move of the year on June 13, taking the target range for the federal funds rate 0.25% higher to 1.75%-2.00%. A new wrinkle was found in the Federal Open Market Committee’s latest dot-plot consensus projection: it suggested four quarter-point rate hikes would occur this year rather than three.³  April saw consumer spending jump 0.6%, but the May number was just a third of that. Consumer wages were up 0.3% in April, then advanced another 0.4% a month later. Retail purchases were up 0.4% in April; then, 0.8% for May.^4,5
Some of the data in the previous paragraph might seem a bit contradictory, but the takeaway was clear: consumers were playing a strong role in keeping the economy healthy. While consumer confidence indices fell during Q2, they were still at lofty levels. The University of Michigan’s index came in at 98.8 in April, then 98.0 in May and 98.2 in June; its historical average is 86.4. The Conference Board announced successive readings of 128.7, 128.0, and 126.4 for its consumer confidence index in April, May, and June, respectively.^6,7
Inflation pressure also mounted during the quarter. The headline Consumer Price Index showed a 2.5% annualized gain through April, and that increased to 2.8% in May; core consumer prices were up 2.1% in a year through April; then, 2.2% as of May. Yearly wholesale inflation jumped from 2.6% in April to 3.1% in May.⁵
Even with those production costs rising, the manufacturing and service sectors of the economy continued their fast growth. The Institute for Supply Management’s factory purchasing manager index improved from 57.3 in April to 58.7 in May, and its service sector PMI also rose across those two months, ascending from 56.8 to 58.6. (At the top of July, more good news rolled in: the factory PMI had climbed to 60.2 in June.) Perhaps these readings would decline in summer, as the federal government reported hard goods orders declined 1.0% in April and 0.6% in May.^4,5
Unemployment declined even further in the second quarter. The headline rate was just 3.9% in April, and it ticked down to 3.8% a month later. In tandem, the U-6 rate, encompassing underemployed workers, fell to 7.6% in May from 7.8% in April. April brought 159,000 net new jobs to the economy, and the Department of Labor said that 223,000 more were created in May.⁵

In late June, the Bureau of Economic Analysis concluded that the economy grew at a middling 2.0% annual pace in Q1. That was still the best first-quarter number since 2015. As the third quarter started, the Federal Reserve Bank of Atlanta’s GDPNow model estimated 3.8% GDP for Q2 (the estimate had been up at 4.8% as recently as June 14).^4,8

GLOBAL ECONOMIC HEALTH
China is coping with U.S. tariffs at an inopportune time. While its official growth target of 6.5% for 2018 may still be met, several signs point to its economy decelerating. Through May, its annualized retail sales pace was the slowest in 15 years, and its year-over-year export growth slipped from 3.7% in April to 3.2% in May. Fixed asset investment growth also tailed off to an 18-month low in the quarter. Given that consumer spending, capital investment, and exports are the pillars of the nation’s economy, this news was troubling. Additionally, the yuan hit a 6-month low versus the dollar in May. China’s central bank had been tightening in step with the Federal Reserve, but it broke ranks in Q2 and left its benchmark interest rate unchanged; it also cut its reserve requirement ratio for commercial banks by 1% in April and another 0.5% in June. Japan, meanwhile, warned the U.S. that it could impose import taxes of its own on U.S. products, especially if the Trump administration announced car tariffs in addition to the existing levies on steel and aluminum from Japan.^9,10

The European Union held its breath as power struggles played out in Italy and Spain: the ascension of the Five-Star Movement and League party in the former country, the replacement of one Prime Minister (Mariano Rajoy) with another (Pedro Sanchez) in the latter. So far, neither country has made noise about exiting the euro. Eurozone yearly inflation accelerated during the quarter, reaching 1.9% in May – the most in 13 months, just beneath the European Central Bank’s 2.0% target. This was a factor contributing to the sunset of the ECB’s longstanding asset-purchase campaign. The ECB announced it will gradually phase out this effort in the fourth quarter and stop buying bonds entirely in 2019. At their June 14 meeting, ECB policymakers also pledged to hold interest rates at current levels through the summer of 2019.¹¹
WORLD MARKETS
The MSCI Emerging Markets index took it on the chin during the quarter: it slipped 8.66% (and was down 7.68% after six months of 2018). The MSCI World index, on the other hand, gained 1.09% in three months.¹²
How did other major benchmarks do in the quarter? Results were mostly positive. The winners included the CAC 40 in France, +3.02%; the United Kingdom’s FTSE 100, +8.22%; Japan’s Nikkei 225, +3.96%; India’s Sensex, +7.45%; Australia’s All Ordinaries, +6.89%; Canada’s TSX Composite, +5.92%. The losers included the German DAX index, -0.82%; Hong Kong’s Hang Seng, -3.78%; China’s Shanghai Composite, -10.14%.¹³

COMMODITIES MARKETS
WTI crude soared 18.42% in the second quarter, leading all commodities except for the international oil benchmark, Brent crude (up 18.92%). WTI crude ended the quarter at $74.25, with supply concerns pushing up the NYMEX price by about $10 during the second half of June alone. Other notable Q2 gains: orange juice, 12.72%; lumber, 12.64%; RBOB gasoline, 9.70%; wheat, 6.19%; the U.S. Dollar Index, 5.56%; cotton, 4.38%; natural gas, 3.85%; palladium, 3.02%.^14,15

Numerous commodities suffered Q2 setbacks. Some of the significant losses: silver, 1.53%; copper, 3.73%; cocoa, 4.18%; sugar, 4.82%; coffee, 7.24%; gold, 7.25%; platinum, 8.60%; corn, 11.61%; soybeans, 18.66%. Gold finished the quarter at $1,254.20 on the COMEX; silver, at $16.06.^14,15

REAL ESTATE
Once again, mortgage rates ascended. As a look at Freddie Mac’s March 29 and June 28 Primary Mortgage Market Surveys shows, interest rates on adjustable-rate home loans made the biggest move. The mean rate on a 5/1-year ARM was 3.66% on March 29, but 3.87% on June 28. Rates on 30-year FRMs averaged 4.55% in the June 28 PMMS, up from 4.44% in late March. Regarding the refinancer’s favorite, the 15-year FRM, the story was similar: a 3.90% mean interest rate on March 29, a 4.04% mean rate on June 28.¹⁶

With the housing market presenting buyers with gradually rising mortgage rates, thin inventory, and high prices, it is little wonder that the pace of home buying decelerated in Q2. The National Association of Realtors found sales slowing 2.7% in April, and then another 0.4% in May. NAR’s pending home sales index, the nation’s top measure of housing contract activity, also weakened. It retreated 1.3% in April and then 0.5% a month later.^4,5

As for new home sales, the story told by Census Bureau reports was slightly different. They were up 14.1% year-over-year through May; they fell 3.7% in April, but surged 6.7% a month later. The median sale price had declined $10,600 in 12 months to $313,000, and the inventory of new homes on the market actually grew 1% from April to May.¹⁷

Groundbreaking, as tracked by the Census Bureau, increased 5.0% for May after a 3.1% reversal during April. Building permits fell 1.8% for April and 4.6% a month afterward.⁵

T I P   O F   T H E   Q U A R T E R
Are you a freelancer? Here is a mid-year reminder to get ready for taxes. See if you can calculate how much you’ll have to pay the I.R.S. in April 2018. Start setting aside a little money per month, so that you can pay the bill with ease.

LOOKING BACK… LOOKING FORWARD
The small caps came in first in the second quarter: the Russell 2000 rose 7.43% to 1,643.07. After its sizable Q2 advance, the Nasdaq Composite stood at 7,510.30. The Dow ended the quarter at 24,271.41, the S&P 500 at 2,718.37. The CBOE VIX? The stock market’s primary fear gauge settled at 16.09 on June 29, down 19.43% in three months.¹

Sources: wsj.com, bigcharts.com, treasury.gov – 6/29/18^{1,18,19,20,21}

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

So, what could this third quarter hold for equities? Can the market retain its upward bias, maybe even strengthen it as the summer proceeds? It is possible, but bulls will have to overcome some big factors: the major headwinds from the multinational tariffs fight, perceptions that growth may be slowing or moderating in China and the European Union, rising inflation, and the ongoing normalization of monetary policy by the Federal Reserve. Then again, the recent ISM PMIs, consumer confidence surveys, the labor market, and decent-to-good retail sales and consumer spending figures seemed to affirm the economy’s health this spring; the first estimate of Q2 GDP may also impress investors. In addition, the Fed’s monetary policy remains essentially supportive. If the trade battles continue to siphon enthusiasm from Wall Street, however, bulls may trot to the sidelines and stay there for much of the quarter.

Q U O T E   O F   T H E   Q U A R T E R

“Politeness and consideration for others is like investing pennies and getting dollars back.”

Thomas Sowell

Marc Aarons, 714-887-8000 or marc@ocmoneymanagers.com

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Please feel free send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)

MMI Disclosures

CITATIONS:

1 – quotes.wsj.com/index/SPX [6/29/18]

2 – marketwatch.com/story/trade-war-tracker-here-are-the-new-levies-imposed-and-threatened-2018-06-22 [6/22/18]

3 – forbes.com/sites/advisor/2018/06/19/fed-now-hinting-at-four-potential-rate-hikes-in-2018/ [6/19/18]

4 – marketwatch.com/economy-politics/calendars/economic [6/29/18]

5 – investing.com/economic-calendar/ [6/30/18]

6 – ycharts.com/indicators/consumer_sentiment [7/2/18]

7 – investing.com/economic-calendar/cb-consumer-confidence-48 [7/2/18]

8 – forbes.com/sites/chuckjones/2018/07/01/second-quarter-u-s-gdp-growth-forecast-drops-1-in-two-weeks/ [7/1/18]

9 – scmp.com/week-asia/opinion/article/2153142/trade-war-looms-us-looks-confident-china-not-so-much [6/30/18]

10 – tinyurl.com/yafqsgwk [6/29/18]

11 – focus-economics.com/regions/euro-area [6/27/18]

12 – msci.com/end-of-day-data-search [6/29/18]

13 – news.morningstar.com/index/indexReturn.html [6/30/18]

14 – barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [7/1/18]

15 – money.cnn.com/data/commodities/ [6/29/18]

16 – freddiemac.com/pmms/archive.html [7/2/18]

17 – tradingeconomics.com/united-states/new-home-sales [6/25/18]

18 – markets.wsj.com/us [6/29/18]

19 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F30%2F08&x=0&y=0 [6/29/18]

20 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [6/29/18]

21 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [6/29/18]

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE).  The Nikkei average is the most watched index of Asian stocks. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent}

The post Quarterly Economic Update – July 2018 appeared first on Money Managers, Inc..