Friday Wrap: Analysis of News and Events for the Week

A Rollercoaster Start to the Year, Plus a Prediction for 2020

The first week of the year new has proved to be a blockbuster for the stock market as both the Dow Jones Industrial Average and the S&P 500 hit record highs. On Jan. 2, the first day of trading in the new year, the Dow jumped 251 points (0.9%) while the S&P 500 also saw 0.6% higher trading with the Nasdaq gaining 1.1%. 

Gains continued after the monster end of 2019 where the S&P 500 rose close to 30% for the year, it’s largest yearly gain since 2013. The Dow jumped by 22.3% in 2019 and the Nasdaq rose by a whopping 35%.

And then, Thursday evening happened. Dow futures tanked by 300 points in reaction to the news that a U.S. air strike killed Iran’s top military leader. Futures for the S&P 500 and Nasdaq also started off lower on Friday morning. U.S. Treasury yields also slid with the benchmark 10-year note trading at 1.824% in the early morning hours. It was above 1.9% on Thursday. The 30-year Treasury note was at 2.28% Friday morning pre-trading, down from 2.389%. 

Oil prices also saw a sharp change, rising by close to 4% in early trading hours. As of 6 a.m. Eastern, Brent crude was trading at $69.21 a barrel. 

This development has certainly muted the momentum from the end of 2019. The promise of a signed phase one trade deal with China. Earlier this week, President Trump announced that a deal would be signed on Jan. 15. President Trump also said there are plans to travel to Beijing in the near future to negotiate a more all-encompassing deal.

Perhaps the biggest effect has been seen in global markets. After Trump’s tweet about a signed deal, Chinese officials announced the country’s central bank would free up 800 billion yuan. That was a badly-needed jolt for European markets which jumped 1.3% to start the year. Even Germany’s previously negative 15-year bond yield hit positive territory (0.001%), albeit briefly, with the Bund 10-year hitting a seven-month high of -0.157%. 

It’s fascinating to compare and contrast the gross domestic product growth of the United States and China since the countries have been embroiled in the trade war. The chart below from CNBC shows the comparison for percentage change in real GDP growth year-over-year. Man economists predict that the GDP will moderate even more in 2020. 

The trade balance itself has not changed much since the beginning of the trade war, rather it’s the manufacturing sector that has taken the biggest hit mainly for the United States. Again, a chart from CNBC shows the steep decline for the U.S. with China’s remaining more or less flat. However, it was already in contraction territory (which is a reading below 50) so it has not grown out of that since the trade war began. 

Coincidentally, despite tariffs, retail sales remained fairly steady for both countries and currency moves favored the United States because of the relative overall strength of the economy. Stocks have been volatile, moving with any positive or negative news reports, or tweets, about the trade deal itself. 

Cautionary Moves

The Consumer Confidence Index, from the Conference Board, New York, shows that consumers’ positivity is waning. There wasn’t a significant change in the consumer confidence overall number month-over-month, but the Expectations Index–which is based on short-term outlooks based on income, business and labor market conditions–decreased from 100.3 to 97.4 month-over-month. 

The labor market is one thing helping balance all the sluggish growth elsewhere, with the unemployment rate still hovering around 3.5%, the best in about 50 years. Jobless claims were a little below expectations for the week ending Dec. 28, hitting a seasonally adjusted 222,000 according to the Labor Department. That’s about 3,000 below what economists had predicted. The four-week moving average tells a little bit of a different story. That average rose to 233,250 which is its highest level since Jan. 2018. However, the labor market overall remains strong which has allowed for more consumer spending to counteract drop offs in manufacturing growth and business investment.

Housing Market Ready for Another Big Year

The first report from Freddie Mac in the new year shows an average mortgage rate of 3.72% for a 30-year fixed rate mortgage. That is essentially where rates have hovered over the last couple of months of 2019 and it is expected that rates will be right around that average for most of 2020. Combined with a strong labor market and solid consumer spending levels, many economists are predicting 2020 will be another great year for housing. 

The lasting issue, one that we discuss each week, is inventory and that has turned into a cost issue. Home prices started increasing at the end of 2019 as inventory was reduced through sales due to lower interest rates. The latest Case-Shiller Home Price Index shows that home prices grew by 3.3% year-over-year. 

“With October’s 3.3% increase in the national composite index, home prices are currently more than 15% above the pre-financial crisis peak reached July 2006,” said Craig Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices. 

He continued, “As was the case last month, after a long period of decelerating price increases, the national, 10-city, and 20-city composites all rose at a modestly faster rate in October compared to September. This stability was broad-based, reflecting data in 12 of 20 cities. It is, of course, still too soon to say whether this marks an end to the deceleration or is merely a pause in the longer-term trend.”

What Does 2020 Hold?

2020 will certainly be a big year for the housing industry with what I predict will challenge $2 trillion in originations. Interest rates, especially at the beginning of the year, will stay moderate. However, I believe the 10-year Treasury note yield will start to creep back up over the year and close at 2.25%, taking mortgage rates slightly higher with it but remaining around 4%. 

Currently, inflation is still falling short of the 2.0% benchmark set by the Federal Reserve and I do not expect it to hit that mark in 2020 either. The Fed has already said it does not expect to change rates at all in 2020 and I expect inflation will continue to flounder sub 2% as defined by the personal consumption expenditures index (PCE). I believe the PCE index will go up by 1.8%, showing a 0.1% increase year-over-year but still hitting below the 2% target rate. 

Gross domestic product will continue to moderate as the fire of the economic expansion cools. Expect GDP to move back down to 1.8% growth for full-year 2020. However, equities should continue to profit in the election year with the S&P 500 gaining another 3% year-over-year. 

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized contract.