Despite the U.S.-Iran conflict—or, more correctly, due to a belief in the de-escalation of it—the Dow Jones Industrial Average, the S&P 500 index and the tech-heavy Nasdaq Composite index all closed at record highs yesterday.
The somewhat surprising, but welcome, gains reflect traders who have remained remarkably calm despite the recent threat of war. And they had good reason to be patient, as the fundamentals continue to point to further economic growth: Interest rates are low and the consumer, who remains deep-pocketed with ample savings and spending, is in high demand—as seen in this morning’s reported 3.5% unemployment rate for December.
For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 have returned 1.5% and 1.4%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is flat at 0.0% so far in 2020. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has ticked down to 2.29% from 2.31% at 2019’s end. On a total return basis, the U.S. bond market has gained 0.2% for the year.
Perspective on the U.S.-Iran Conflict
One week ago, the U.S. assassinated a notorious, terroristic Iranian general, causing skyrocketing geopolitical tensions and putting the oil-rich Middle East on U.S. pins and Iranian needles. We saw the kinds of knee-jerk trading responses you might expect: Oil jumped 3.6% the day after the news broke while gold prices rose 1.6% and the S&P 500 index fell 0.7%.
Just one week later, the muted Iranian response—which did not harm any U.S. citizens—created enough of a clearing for President Trump to call for an expansion of NATO to include the Middle East and a lessening of the rhetoric on both sides. Tensions have eased the past two days but could ratchet back up quickly. It’s still reasonable to ask: “Should I be worried?”
The somewhat surprising, but welcome, gains reflect traders who have remained remarkably calm despite the recent threat of war.
Currently, we think concerns about higher oil prices hurting our economy may be overstated. Wells Fargo came out with a report this week showing that consumers are spending less than half as much on gasoline today as they did during the 1970s oil embargo. And it’s not because they’re driving less. Plus, higher oil prices could spur increased drilling and investment, a boon for the economy and American workers. In short, our economy has evolved over the last 40-plus years.
Second, while we’re not trying to discount the gravity of what’s occurred in the past week and what may be yet to come, we also note that there’s always been conflict in the Middle East—this is nothing new. To put the current crisis through our analytical lens and into perspective, we looked back at flash points over the last 50 years or so to see how stocks fared in the ensuing month and year.
The bottom line is that a conflict or crisis with Middle East origins has generally not been a reason to avoid the stock market. Investors who used a Mideast crisis as a rationale for selling often did damage to their wealth-building goals. (You can hear more on this topic in The Adviser You Can Talk To Podcast episode linked below.)
Service Sector Thrives as Manufacturing Fades
Earnings drive markets. So, we’ll be watching closely as companies begin reporting on fourth-quarter earnings in earnest next week. We’ll keep you informed of what the numbers and the accompanying CEO commentary have to say about where we are in the economic cycle and where we might be heading. Before we get there, we can turn to recent economic reports.
Therein, we see an ongoing disconnect between the manufacturing and service sides of our economy. The ISM Manufacturing index, a gauge of that broad industry, came in weaker in December than November, which was itself lower than in October—an unsettling trend of ongoing weakness. (Boeing’s decision to suspend production on its beleaguered 737 Max airliner will further dent the numbers going forward.)
As we note time and again, manufacturing has become a smaller and smaller piece of our economy’s pie—only about 12% today. The ISM’s measure of the service sector (80% or so of our economy according to the World Bank) rose about as much as the manufacturing index fell, a signal of the continued growth for that much-larger portion of our economy. As with our reliance on oil, this is another sign of our how economy keeps evolving. The consumer-driven service sector now powers our economic growth.
Good News: Health Care Advances Saving More Lives
We’re always happy to report good news. One datapoint that caught our eye this week came from the American Cancer Society, which stated that the cancer death rate dropped 2.2% from 2016 to 2017—the largest annual decline on record. The biggest gains came from breakthroughs in melanoma therapies and advances in lung cancer treatment (and fewer Americans smoking). This speaks to the level of innovation and progress made in health care, one reason—along with aging demographics and the rising global middle class—why we continue to believe the sector offers long-term growth potential.
Cancer is still the second leading cause of death in America, and rare is the family untouched by it. But, aside from the investment reasons, we welcome developments like these as yet further proof that things are getting better, even if it doesn’t always seem that way in the headlines, or if you’ve recently lost a loved one to cancer.
New Podcast: Iran Impact—How Middle East Tension Affects Markets
In the latest episode of The Adviser You Can Talk To Podcast from our parent company, Adviser Investments Chief Investment Officer Jim Lowell and Deputy Director of Research Brian Mackey dig through the data and sift through the sands of historical crises in the Middle East and their impact on the markets. Jim and Brian’s lively conversation looks at effects on commodity prices and stock markets, as well as the potential impact of cyberattacks.
With a new year comes a series of new (and often repeated) resolutions. While we think this is an opportune time to reassess your financial goals and aspirations, we also understand that a new year often creates a deluge of tasks, so we’ll keep this week’s Financial Planning Friday brief and to the point.
Are you planning any major expenses in the coming year—a home renovation or purchase, the start of college tuition, or maybe that ‘round-the-world cruise? Or are you concerned that your cash balance or income won’t meet your needs? (You can use Adviser Investments’ Budget Worksheet to help figure out where you stand.)
If your answer to either of these questions is “yes,” it’s time to review your spending plan for 2020 either on your own or with the help of a trusted adviser.
After all, it pays to plan your spending and savings in advance. Take the time today to evaluate your cash reserves and expected income over the next year.
We expect Iran and China to vie with Brexit and impeachment for time in the spotlight next week. But we’ll be also be reviewing reports on small business confidence, inflation, manufacturing, retail sales, homebuilders’ confidence, new residential construction and building permits, job openings and consumer sentiment, as well as the Federal Reserve’s “Beige Book” of anecdotal reports from around the nation. We will also see earnings reports from a handful of companies, including a number of the big banks and financial service stalwarts (typically a good gauge of consumer health and business borrowing activity) next week ahead of a deluge of earnings news the following week.
As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.
Please note: This update was prepared on Friday, January 10, 2020, prior to the market’s close.
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