Although the month closed on a down note with the three major averages down for the shortened trading day on Friday, the markets had a very strong month.
The Dow and S&P were up 3.72% and 3.4% respectively and the Nasdaq finished higher by 4.5%. Interest rates trended slightly higher with the 10-year treasury closing the month at 1.776%. Consumers, which have been the story for 2019, started off the holiday shopping season with some record setting spending numbers. Traffic at the malls was down, but online sales soared on Black Friday registering the second largest on-line sales day ever at $7.4 billion. Retailers that offer the option to buy online and pick up at the store benefited with a 43% increase in orders from last year. The average order value was also up 6% from a year ago to $168, demonstrating consumers’ willingness to buy more and higher price items online. With a shortened holiday shopping season, it is difficult to gauge how strong the end results will be.
The continued strength of the economy could certainly be helping the initial showing on consumer spending. Third quarter GDP came in slightly ahead of forecasts at 2.1%. Fourth quarter numbers are tracking at slightly below 2% but economists indicated that the economy is not about to fall off a cliff. Consumer sentiment unexpectedly rose in November according to data released by the University of Michigan. Sentiment numbers have not been this strong since the period from 1998 to 2000 according the Richard Curtin, chief economist at the Surveys of Consumers. The continuation of trade uncertainty and weakness in business spending remain a risk to the downside. Research indicates that businesses have been absorbing most of the impact of tariffs so far. Large retailers such as Walmart and Target have the volume to absorb the cost, while smaller less nimble retailers do not. Failure to deliver on trade for an extended period will make it challenging for even the largest retailers to continue to absorb the cost. Rising costs would certainly be a challenge to the strength of the consumer going forward.
Many would credit part of the strong move in equites to the Federal Reserve. The minutes of the October Federal Reserve meeting, released in November, indicated that monetary policy, “likely would remain” where it is “as long as incoming information about the economy did not result in a material reassessment of the economic outlook.” One year ago, monetary policy was in tightening mode and markets feared that the Fed had already or would go too far with raising rates. With three rate cuts now in the books for 2019 and downside risks to the economy still elevated, support from the Fed has been largely viewed as positive for the economy and therefore positive for markets. Wall Street strategists largely agree that we could see at least one more cut next year and as many as three. Some, however, believe that the recent strength in the economy could turn the Fed in the other direction quickly and that we could receive a rate hike next year. Every piece of economic data will be interpreted for its potential impact on monetary policy.
Not only did the markets reach new highs during November, the Dow closed above 28,000 for the first time. According to Sam Stovall of CFRA, history tells us that Wall Street isn’t bullish enough. According to his research when the market is up in January and February the S&P 500 is up for the year, 100% of the time. This has only happened 28 times and the average return is 24% for the full year. We are now in the longest and best performing bull market since World War II. The gain in the S&P 500 since March 9, 2009, is 468% as of the first of November. With the new record high during the month that number is now 472%. The bull market from 1949 to 1956 was until now, the best bull market in history at a total return of 454%. From an economic perspective the combination of low rates, low unemployment and fiscal stimulus, it doesn’t get much better. Add to it that the rest of the world is not doing as well and if you are from anywhere around the world and have capital to put to work, the U. S. is the best place to be. The health of the rally has also recently got better, from at least one perspective. The small cap index known as the Russell 2000, broke out to new highs in November as well. This indicates that even more parts of the market are working, and the rally is not limited to a very small segment or small number of companies.
The question for many is, will it continue? For the year, the S&P 500 is up 25.3%. Since 1928, there have been 17 years that the S&P 500 was up more than 25%. In the following year, 71% of the time, the market is also higher and was up an average of 7% according to FactSet data. We are not through the year yet and for those of you with a good memory, should remember what happened last December. We have to get through this month, but with the Federal Reserve on hold, it is going to come down to a few things that will drive the direction of markets in the final weeks of trade. There will be a close eye on the strength of the consumer to see if the holiday shopping season turns out as strong as it is hoped. The underlying focus will continue to be trade. Optimism is high that the President will at least have a phase one deal that could lay the groundwork for additional agreements with China. Lack of any positive developments and a delay into 2020 would be a headwind at current market levels. Positive news would help to support the levels we have reached so far.
This is a great time of year to spend time with family and friends. It is easy to forget in the fast pace world we live in, to take time for the ones we love. Hopefully over the next several weeks we can all remember to make it a priority to enjoy the things that are important to us and spend some time with the people that make our lives special. Happy Holidays!