Job market numbers reported in December for November were well above expectations. Non-farm payroll additions were 266,000, which were well above the projected 180,000. Furthermore, revisions for the prior two months showed 41,000 additional job gains than previously reported. The unemployment rate declined to 3.5% when it was expected to stay at 3.6%. Although the monthly increase was slightly below expectations, average hourly earnings came in at 3.1% on a year-over-year basis, which was better than anticipated.
The strong job market in the United States continues and, as a consumption driven economy, we believe financially healthy and employed consumers are an important factor to economic growth. One topic of discussion moving into 2020 is whether this tight job market with wages moving higher will ultimately put upward pressure on inflation. Inflation readings have moved somewhat higher, but pressures do not seem to be building and the Fed’s preferred inflation measure, the Personal Consumption Expenditures Core Index, only showed a year over year gain of 1.6% in November.
Retails sales growth (ex. auto and gas station sales) were flat in November when a 0.4% monthly gain was expected. While modest, prior month retail sales data was increased to show a 0.2% monthly gain instead of the previously reported 0.1% advance. Although the holiday shopping season was cut short in 2019 with the late Thanksgiving holiday, reports have showed solid spending by consumers. Housing starts and building permits both exceeded estimates, but new home and existing home sales both were below expectations.
The widely followed Institute for Supply Management (ISM) Manufacturing Index continued to linger below 50 in November (released in December), the dividing line between expansion and contraction. Despite news of a phase one trade deal being reached with China, the broader trade uncertainty is likely directly impacting manufacturing in the U.S. However, the ISM non-manufacturing index, which covers the much larger service industries in the U.S. economy, came in at 53.9 in November, just below expectations of 54.5. This reading has remained comfortably in expansion territory during 2019.
The Leading Economic Indicators Index from the Conference Board was flat in November when a monthly gain of 0.1% was anticipated. The prior month’s decline was revised down to reflect a -0.2% decline from a previously reported -0.1% drop. This is an indicator we watch closely as it tends to give some insight on the future direction of economic growth. The third reading of third quarter GDP showed 2.1% annualized growth as expected.
As previously discussed, Chairman Powell signaled after the third rate cut at the FOMC meeting in October that the Fed would be on hold for some time, unless economic conditions changed. The three rate cuts appear to be all that the Fed has an appetite for at this stage in the economic cycle. With stocks at record highs, inflation benign, and the job market showing some of its strongest readings in 50 years, it would be hard to imagine the Fed continuing to cut rates. We might be in for a period where the Fed moves out of the limelight in 2020.
The Fed has been on quite a ride over the last year moving from a hawkish stance at the end of 2018 to a more dovish tone in 2019. After three rate cuts in the second half of this year, the Fed concluded that further cuts will likely be on hold as the year ends, and we expect no change in rates at the 2-day meeting that concludes on December 11th. With ongoing strength in the job market, stocks at all-time highs, and inflation rising at a measured pace, we might be in for a period where the Fed moves out of the limelight.
We continue to expect economic growth well into 2020. The Fed now appears to be on hold for now, but the wrap up to the impeachment and a presidential election still loom in 2020. In the near-term, the China trade situation seems improved and markets have responded accordingly. Stock valuations are elevated, but we are still in a period of low historical interest rates and earnings growth is expected to be stronger in 2020 compared to last year. After such a strong close to the year, profit taking and volatility might materialize in the early part of the year, but we believe fundamentals will drive long-term results. The economy looks poised to continue to grow and should the global growth picture stabilize, corporate America should continue to grow earnings in 2020.
INVESTMENT IMPLICATIONS
Clark Capital’s Top-Down, Quantitative Strategies
The markets remained in risk-on mode in December, capping off the 12th strongest total return year for the S&P 500 in the post WWII era. Our Style Opportunity portfolio models continue to favor value stocks and buybacks. We are witnessing most style and factors performing similarly – a sign of market strength.
Credit markets remain firm, with our models recently making new highs favoring high-yield bonds over U.S. Treasuries and cash equivalents. High-yield spreads are very narrow, which translates to little price appreciation potential, but we believe that continued economic growth supports credit.
Clark Capital’s Bottom-Up, Fundamental Strategies
Dividend stocks kept pace with the strongest U.S. market in six years fueled by a shift in monetary policy by the Fed, which cut rates in July for the first time in a decade. Although a handful of big technology stocks dominated in 2019, the S&P 500 Index gains for the year were broad, with over 90% of its stocks rising. Bank stocks were among the biggest gainers of the supportive Fed policy with the Nasdaq KBW Bank Index up over 35% and the largest U.S. banks posting solid gains.
According to FactSet, S&P 500 revenues are due to rise in the high single digits in 2020 after subpar growth in 2019. As such, we believe historically low interest rates are poised to continue into the next decade as investors continue to invest in dividend growth stocks as one of the few viable income plays.
| Event | Period | Estimate | Actual | Prior | Revised |
|---|---|---|---|---|---|
| ISM Manufacturing | Nov | 49.2 | 48.1 | 48.3 | — |
| ISM Non-Manf. Composite | Nov | 54.5 | 53.9 | 54.7 | — |
| Change in Nonfarm Payrolls | Nov | 180k | 266k | 128k | 156k |
| Unemployment Rate | Nov | 3.60% | 3.50% | 3.60% | — |
| Average Hourly Earnings YoY | Nov | 3.00% | 3.10% | 3.00% | 3.20% |
| JOLTS Job Openings | Oct | 7009k | 7267k | 7024k | 7032k |
| PPI Final Demand MoM | Nov | 0.20% | 0.00% | 0.40% | — |
| PPI Final Demand YoY | Nov | 1.30% | 1.10% | 1.10% | — |
| PPI Ex Food and Energy MoM | Nov | 0.20% | -0.20% | 0.30% | — |
| PPI Ex Food and Energy YoY | Nov | 1.70% | 1.30% | 1.60% | — |
| CPI MoM | Nov | 0.20% | 0.30% | 0.40% | — |
| CPI YoY | Nov | 2.00% | 2.10% | 1.80% | — |
| CPI Ex Food and Energy MoM | Nov | 0.20% | 0.20% | 0.20% | — |
| CPI Ex Food and Energy YoY | Nov | 2.30% | 2.30% | 2.30% | — |
| Retail Sales Ex Auto and Gas | Nov | 0.40% | 0.00% | 0.10% | 0.20% |
| Industrial Production MoM | Nov | 0.90% | 1.10% | -0.80% | -0.90% |
| Building Permits | Nov | 1410k | 1482k | 1461k | — |
| Housing Starts | Nov | 1345k | 1365k | 1314k | 1323k |
| New Home Sales | Nov | 732k | 719k | 733k | 710k |
| Existing Home Sales | Nov | 5.44m | 5.35m | 5.46m | 5.44m |
| Leading Index | Nov | 0.10% | 0.00% | -0.10% | -0.20% |
| Durable Goods Orders | Nov P | 1.50% | -2.00% | 0.50% | 0.20% |
| GDP Annualized QoQ | 3Q T | 2.10% | 2.10% | 2.10% | — |
| U. of Mich. Sentiment | Dec F | 99.2 | 99.3 | 99.2 | — |
| Personal Income | Nov | 0.30% | 0.50% | 0.00% | 0.10% |
| Personal Spending | Nov | 0.40% | 0.40% | 0.30% | — |
| S&P CoreLogic CS 20-City YoY NSA | Oct | 2.10% | 2.23% | 2.10% | 2.08% |
Source: Bloomberg
Past performance is not indicative of future results. This is not financial advice or an offer to sell any product. Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. It should not be assumed that any of the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.
Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services can be found in its Form ADV which is available upon request. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation to buy, sell or hold any securities, other investments or to adopt any particular investment strategy or strategies. For educational use only.
The Dow Jones Industrial Average indicates the value of 30 large, publicly owned companies based in the United States.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities. .
The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values.
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The Russell 2000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 2000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower expected growth values.
The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
The MSCI Emerging Markets Index is used to measure large and mid-cap equity market performance in the global emerging markets.
The MSCI ACWI ex USA Index captures large and mid-cap representation across 22 of 23 developed market countries and 24 emerging market countries, covering approximately 85% of the global equity opportunity set outside of the U.S.
Bloomberg Barclays U.S. Aggregate Bond Index: The index is unmanaged and measures the performance of the investment grade, U.S. dollar denominated, fixed-rate taxable bond market, including Treasuries and government-related and corporate securities that have a remaining maturity of at least one year.
The Bloomberg Barclays U.S. Corporate High-Yield Index covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
The Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S. dollar denominated, fixed-rate taxable corporate and government related bond markets.
The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury.
ISM Manufacturing Index – A widely-watched indicator of recent U.S. economic activity. The index is often referred to as the Purchasing Manager’s Index (PMI). Based on a survey of purchasing managers at more than 300 manufacturing firms by the Institute for Supply Management (ISM), the index monitors changes in production levels from month to month. The index is the core of the ISM Manufacturing Report.
The ISM Non-Manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms’ purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on the data from these surveys, that monitors economic conditions of the nation.
The Composite Index of Leading Indicators, otherwise known as the Leading Economic Index (LEI), is an index published monthly by The Conference Board. It is used to predict the direction of global economic movements in future months. The index is composed of 10 economic components whose changes tend to precede changes in the overall economy. The Conference Board is an independent research association that provides its member organizations with economic and financial information.
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