Monthly Market Review – January

Highlights

  • The U.S. economy remains resilient as a strong consumer and jobs market outweighs a slowing manufacturing sector.
  • The global stock market started off the year strong amid a ‘Phase 1’ trade deal between the U.S. and China, but was then hindered by fears of the coronavirus.
  • The Fed left key short-term rates unchanged, as expected, but long-term rates fell dramatically as investors fear for the coronavirus’s potential impact on the global economy.

Economic Review

The U.S. economy, as measured by GDP, grew at a moderate 2.1% annualized rate in the fourth quarter of 2019, as consumer spending (which accounts for nearly 70% of GDP) grew at a fairly tame 1.8% annualized rate.  However, when adjusting for inflation, over the past year GDP increased at a strong and stable 2.3%.

Meanwhile, the housing market showed no sign of slowing down as housing starts jumped 16.9% in December and by a staggering 40.8% over the past year.  Much of this steep incline has come from falling mortgage rates that bridge the affordability gap of high home prices.  The retail market has also remained strong, growing at a year-over-year rate of 6.0%.

Although the most recent jobs report came in at a lower-than-expected 145,000, the overall jobs market still looks strong with year-over-year jobs growth at 1.4% and the unemployment rate at a historically low 3.5%.

The manufacturing sector continues to be the burden on what appears to be a resilient U.S. economy, as concerns on trade have caused new orders of durable goods and industrial production to steadily decline over the past year.  However, with a ‘Phase 1’ trade deal between the U.S. and China could potentially help things turn around for the U.S. manufacturing sector.

Market Review

The global stock market started off the new decade on the right foot after receiving support from the optimism surrounding a ‘Phase 1’ trade deal between the U.S. and China.  However, that support and optimism was soon washed away amid fears of a coronavirus outbreak and its potential impact on the global economy.

Emerging markets (which includes China) have suffered the most on the news of the coronavirus as the virus’s origin came from the densely populated city of Wuhan, China.  The U.S. stock market has, however, been more resilient as U.S. large-cap stocks have only suffered a small decline of 0.06% so far this year.  Meanwhile emerging markets and developed markets are down -5.5% and -3.0%, respectively.

The price of gold has risen nearly 4.5% in the month of January as investors flee to the haven metal.

Despite headwinds from the coronavirus scare, momentum, low-volatility, and growth orientated stocks remain in the black with year-to-date returns of 3.7%, 2.4%, and 2.3%.  However, the value, dividend, size, and quality factors have suffered year to date:  -2.7%, -1.8%, -1.3%, and -0.7%, respectively.

Bond Market Review

Bond yields have largely fallen so far this year amid earlier concerns of a potential conflict with Iran that stemmed from a U.S. airstrike that killed Iranian general Qassem Soleimani, and more recent concerns of the coronavirus.  That said, the 10-year Treasury yield (a measure of longer-term rates) started the year at 1.88% and now sits at approximately 1.65%.  Meanwhile, the 2-year Treasury yield (a measure of shorter-term rates) started the year at 1.58%, currently slipping to approximately 1.36%.

With yields falling, longer-term bonds have benefited the most as long-term Treasuries (25+ years) have jumped approximately 7.7% so far this year, while the overall bond market is up just about 2.0%.  High-yield “junk” corporate bonds have underperformed the overall bond market so far this year with a negative return of 0.5% as demand fell for the riskier slice of fixed income.

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