Dovish Fed Comments Help Fuel Last Week’s Stock Market Surge

By Horizon Investments

The U.S. economy showed signs of both strength and weakness last week. Updated second-quarter GDP data remained robust, at 3.5%, while personal spending was stronger than expected and the Chicago PMI (a gauge of manufacturing activity in the Chicago area) for November exceeded estimates—hitting an 11-month high. That said, initial jobless claims were higher than anticipated as they rose for the third consecutive week. Additionally, housing remained soft: The S&P CoreLogic Case-Shiller U.S. National Home Price Index grew more slowly than expected in September.

In Europe, unemployment across the continent was stable on a month-over-month basis but slightly worse than predicted. French consumer spending topped estimates as the country’s GDP was stable and in line with expectations. German unemployment fell but retail sales in the country were weaker than expected. In Asia, Japanese retail sales and industrial production beat forecasts. However, Chinese manufacturing and non-manufacturing PMIs disappointed—renewing concerns about the global economy.

The U.S. equity markets rallied strongly last week following comments by Federal Reserve Chairman Powell suggesting that the Fed may not need to raise interest rates aggressively going forward. The consumer discretionary and technology sectors led the charge as investors once again adopted a more “risk-on” orientation. Materials and utilities underperformed, but were still positive for the week.

European markets also fared well, but lagged behind the U.S. Gains early in the week, fueled by good news about the Italian budget and the EU’s validation of the UK’s withdrawal conditions, faded somewhat due to uncertainty surrounding the weekend’s G-20 summit. European auto stocks were dampened by trade issues and concerns about demand from China, while European telecom stocks benefited from positive sentiment about merger and acquisition activity in the sector. In Asia, Japanese investors took their cues from Powell’s dovish comments about interest rates in the U.S.—helping growth-oriented equities rebound.

Emerging markets also gained in the wake of the Powell’s statements, as lower U.S. rates benefit emerging markets significantly. However, weaker PMI data out of China took some wind out of emerging markets’ sails by the end of the week.

In the fixed-income markets, shorter- and intermediate- duration securities outperformed long-duration bonds. High-yield credits fared the best as the market shifted into a more risk-on mode. Both sovereign and corporate emerging markets debt appreciated during the week as the investors became more pro-risk and as currencies were stable or up.

GAIN: Active Asset Allocation

A strong week for equities was driven largely by positive comments about interest rates from the Fed and by investors’ hope of progress on trade relations between the U.S. and China. Indeed, a weekend meeting between President Trump and Chinese President Xi went better than expected. Tough talk concerning tariffs has been the biggest weight hanging over the markets recently.