President Trump announced that he will sign the phase 1 trade deal with China on January 15th and will travel to China at a later date to negotiate a broader trade deal. China also reduced bank reserve requirements to add about $115BN to the financial system and therefore boosting the economy.
Middle East tensions escalated affecting the markets on Friday. Last Friday, a U.S. base near Kirkuk, Iraq was attacked by an Iranian-backed militia group and the U.S. launched airstrikes on the militia group in Syria and Iraq last Sunday. On Tuesday dozens of Shiite militiamen and their supporters broke into the U.S. Embassy compound in Iraq. Then on late Thursday, the U.S. stuck the Baghdad airport, killing Iranian general Qassim Soleimani and Abu Mahdi al-Mohandes. General Soleimani was the head of the Islamic Revolutionary Guard Corps and commander of the Quds force. The Quds force was primarily responsible for extraterritorial military and clandestine operations. This resulted in threats of “hard revenge” against the U.S. This caused stocks to selloff on Friday with a rise in oil and gold prices.
Putting the Middle East aside for the moment, our outlook for 2020 remains positive. The Federal Reserve will likely remain accommodative as long as inflation remains tame. The U.S. has achieved a high level of employment. Decent wage growth and low household debt servicing ratios bode well for consumer spending. Manufacturing continues to expand but at a slower rate. Signs of a global slowdown have been receding. A phase 1 U.S. China trade deal should help boost growth modestly. Earnings are expected to rise during calendar year 2020 following a flat to slightly down 2019 and a sharp increase in 2018. Still, given current market valuations, we believe expectations should be for more modest returns in 2020.
Certainly, there are risks that could alter our view. While the Middle East situation cannot be overlooked, when looking strictly at the U.S. economy, we believe this poses a smaller negative than in the past. U.S. energy production has grown substantially with oil production more than doubling since 2000. However, depending on how far things escalate this could further upset the markets.
Source: U.S. Energy Information Administration
The 10-year Treasury yield fell to 1.789%. Crude oil rose to $63.04 a barrel. The U.S. dollar fell against a basket of currencies and gold prices rose to $1555.20 an ounce.
In economic numbers this week:
- The S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 3.3% in October from a year ago up from 3.2% in September.
- The Markit/Caixin reported for China
- Manufacturing PMI fell from 51.8 in November to 51.5 in December. Anything over 50 represents expansion, just at a slower pace.
- The Markit U.S. PMIs:
- Manufacturing fell from 52.6 in November to 52.4 in December.
- The Labor Department reported first time claims for unemployment fell 2,000 to a seasonally adjusted 222,000. The four week moving average of claims rose to 228,000.
- The EIA weekly oil report is here: wpsrsummary (12) Also, the EIA reported in the past week:
- Field production of crude oil was unchanged at 12.9MM barrels per day..
- Natural gas storage fell by 58BN cubic feet and is slightly below the five year average at this time of year.
- Baker Hughes reported the number of active oil rigs fell 7 to 67-07 and the number of active gas rigs fell 2 to 123.
Please call us if you have any questions.
Loren C. Rex, CFP®, AIF®, MA Erik A Smith AIF®
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
77 E. Michigan Ave, Suite 140
Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
Visit our Website: www.genfinplan.com
Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.
These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. The Indices mentioned are unmanaged and cannot be invested into directly.