The Dow Jones Industrial Index closed above 29,000 for the first time ever in mid-January as equities excelled, but then pulled back from record levels at month’s end. The 29,000 mark is a preliminary milestone for the next milestone of 30,000. The S&P 500 Index and the Nasdaq reached higher levels as well in mid-January, with an overall pullback for the indices at the end of the month.
The phase one trade deal between China and the United States helped propel equities higher as the anticipation of less friction between the countries is expected to eventually advance trade activity. The Fed’s continued guarantee of a rate environment along with minimal inflationary pressures continue to be a dynamic driver for expansion and hiring objectives of companies.
The low rate environment continues to fuel mortgage refinances helping to sustain housing prices across the nation. Mortgage rates for conventional 30-year fixed loans fell to levels not seen since before the 2016 presidential election.
US Bond yields moved lower in late January as the threat of the Chinese coronavirus influenced a shift from stocks to bonds. U.S. corporate and government bond indices advanced ahead of domestic and international stock indices in January, pulling the yield on the 10-year U.S. Treasury down to 1.51% on January 31st.
Amid uncertainty surrounding the spread of the coronavirus throughout China and internationally. Global equity and bond markets reacted to supply chain disruptions and factory closures. China’s vast manufacturing sector — which is an essential component of supply chains for many U.S. companies — has become vulnerable to plant closures and employee quarantines throughout the country.
Markets are concerned that the coronavirus may impede global growth and recently implemented trade agreements as shuttered manufacturing facilities may reduce Chinese exports as well as imports of raw materials and commodities into China.
Closed manufacturing facilities due to the virus outbreak throughout China are expected to have a lingering effect on U.S. and foreign companies with operations in the country. Supply chain issues affecting products ranging from cell phones, computers, and televisions to furniture and toys may hinder production of such products for some time. An accompanying concern is that Chinese consumers refrain from spending, thus hindering Chinese consumer expenditures at home and abroad. According to the World Bank, Chinese tourists spent over $271 billion in 2017 worldwide, more than any other international traveler. Global economic growth is sensitive to China’s massive manufacturing and consumer base, generating wholesale and retail trade worldwide.
The phase one trade deal between China and the United States has alleviated some uneasiness surrounding trade tensions. The U.S. will retain most tariffs on $360 billion of goods from China until a phase two agreement is reached.
Britain’s tumultuous 47-year membership of the European Union (EU) ended on January 31st, resulting from a vote to exit the EU in 2016, also known as Brexit. Britain’s departure from the EU is the first significant exit from the EU of any of the 27-member countries. The exit is expected to influence the financial, banking, and immigration structure for the entire EU.
Middle East tensions abated towards the end of January after sparking market volatility that arose earlier in the month, sending equities lower and affecting oil prices. Geopolitical uneasiness continues, however, as the Middle East region struggles with ongoing uncertainty.
The Commerce Department released its most recent economic data as measured by Gross Domestic Product (GDP), showing a 2.1% annualized growth rate, meanwhile consumer spending decelerated to a 1.8% pace, identifying a probable slowdown of consumer expenditures.
Inflation came in at 2.3% last year as reported by the Bureau of Labor Statistics. Inflation, as measured by the Consumer Price Index (CPI), falls short of the most recent Social Security COLA increase of 1.6%.
Sources: Commerce Department, EuroStat, Social Security Admin., World Bank