What’s on Tap: Stock Markets Bounce Back After Last Week’s Turkey

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  • Fed Likes What It Sees: Interest Rate Comments Spark Market Rally

  • Confident Consumers Ramp Up Online Holiday Spending

  • Demograyphics—Driving Health Care Innovation and Investment Appeal

  • Looking Ahead to Manufacturing, Employment, Beige Book and More

Stocks are rebounding from the tryptophan slump of the Thanksgiving-shortened trading week as concerns about Federal Reserve interest-rate hikes and trade wars have eased. The Dow Jones Industrial Average posted its best day since March on Wednesday, gaining 2.5%—putting the index firmly in the black for the year despite a rocky October and November.

After the incredibly smooth ride that was 2017, the past two months have been a useful (if not always enjoyable) reminder that markets can and do drop at times. Bear markets happen, as do recessions. It’s been nearly a decade since we’ve seen either in the U.S. stock market or economy.

We think it’s worth remembering that investors’ portfolios are likely significantly bigger today than they were 10 years ago. That’s something to be thankful for at this time of year, but it also means that daily market moves may appear to have larger dollar consequences than we’ve become accustomed to. Plus, it bears repeating that the odds we’ll experience another low-volatility, almost uninterrupted bull market over the next decade are near nil. That’s why we believe that setting appropriate expectations and managing portfolios to long-term objectives and tolerance for risk are more important now than ever.

For the year through Thursday, the Dow Jones Industrial Average has returned 4.7%, while the broader S&P 500 has gained 4.2%. The MSCI EAFE index, a measure of developed international stock markets, is down 8.9%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.55% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.8% for the year.

Fed Likes What It Sees: Interest Rate Comments Spark Market Rally

Wall Street’s traders were all but breathless as Fed Chair Jay Powell gave a much-awaited speech Wednesday. His comments on interest-rate policy touched off a massive stock rally when investors inferred from Powell’s words that the central bank is about done with hiking the benchmark fed funds rate. While he stressed that policymakers will remain data-dependent, Powell allayed concerns, for the moment anyway, that the Fed’s governors would overdo their attempts to keep the economy on an even keel and tip the U.S. into recession.

Powell repeated his view that’s “there’s a great deal to like about [the economic] outlook.” Clearly, he’s not looking to surprise the market, second-guess the known data or take any action intended to slow the U.S.’s ongoing expansion.

Confident Consumers Pump Up Online Holiday Spending

Consumers jumped into their cars and onto their computers and smartphones at the ring of the holiday shopping season bell, with more goods going into virtual shopping carts than ever. According to data from Adobe Analytics—which tracks sales at 80 of the top 100 online vendors, including behemoths such as Walmart and Amazon—online shoppers dodged crowds and lines and lit up the Internet over the holiday weekend. Online sales increased 28% on Thanksgiving Day compared to 2017 and were up 24% on Black Friday. Cyber Monday saw sales grow 19% from last year.

Amazon said that Monday’s activity translated into its biggest shopping day ever from an inventory perspective—customers ordered more than 180 million items over the five days from Thanksgiving through Cyber Monday.

A side effect of the online trend is that fewer people are leaving home to shop, with foot traffic at brick-and-mortar stores down slightly on Turkey Day and Black Friday from a year ago. This puts pressure on traditional retailers who may not have a large enough online presence to make up the difference.

A five-day span of spending doesn’t necessarily guarantee that money will continue flowing through year-end. Still, we think it’s going to be hard to keep a well-employed and confident consumer from spending more generously this year than the last, propelling economic growth across the 2018 finish line. One thing we’ll keep an eye on early in 2019 is reports on the level of household indebtedness when the bills for these holiday shopping sprees finally come due.

Demograyphics—Driving Health Care Innovation and Investment Appeal

With its convenience, low prices and vast inventory, Amazon has already changed how consumers shop. Now it’s looking to improve the way patients receive health care. This week, we learned that Amazon is selling software that scans digitized medical records in an attempt to improve patient treatment and reduce costs.

The health care industry has been slower to digitize records than other sectors like retail and financial services. Big tech has taken note. IBM, Apple and Google are also entering the health care space. Time will tell how successful these efforts are, but competition drives innovation, which can lower medical bills and improve care. Medical costs are one of the biggest risks that retirees face, so we welcome initiatives to provide better care at an affordable price.

From an investment perspective, the health care sector’s capacity for innovation is one reason why we’ve long believed that a dedicated allocation to health care stocks is a wise long-term investment in a fundamental portfolio. While there are always temporary political and regulatory risks, the broad scope of the sector allows it to play both portfolio offense and defense.

We see the long-term tailwinds of demograyphics (the aging of the global health care consumer), globalization and innovation as supportive of our continued exposure to health care stocks. It remains to be seen what will result from big tech’s foray into the business, but we are confident in our active managers’ ability to separate the most promising innovations from the herd.

Looking Ahead to Manufacturing, Employment, Beige Book and More

Next week, we’ll be examining data on manufacturing and service sector activity, construction spending, car sales, factory orders, consumer credit and employment, as well as the Fed’s “Beige Book” of anecdotal reports from around the nation. 

Please note: This update was prepared on Friday, November 30, 2018, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. 

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. 

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

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