While tax cut initiatives in 2018 provided a tailwind for U.S. markets, 2019 policies can add to uncertainty and risk. Market have been stabilized so far in January because investors seem to be realizing that recession in 2019 is unlikely. The S&P 500 index is up 5.4% in 2019 and more than 13.5% from the December low.
Economic fundamentals and Fed policy support the market. Nonfarm payrolls surged by 312,000 in December, and the unemployment rate rose 3.9% as more workers joined the labor force. Although wages jumped 3.2% from a year ago, different members of Fed still turn to dovish. Because of increased financial market volatility, rising short-term interest rate, and elevated trade and political uncertainty, the economic outlooks seem to be less optimistic.
Market remain vulnerable to uncertainty
Will this optimistic market environment last? It could, but I see U.S. policies as the biggest wild card that could unsettle market in the next few months. The policies can weigh heavily on consumer sentiment and spending, which are the keys to the health of U.S. economics this year.
Government shutdown is the latest key concern for the market. Donald Trump proposed an immigration deal at 19th Jan in a bid to end a partial government shutdown. This is the first real offer for an end to government shutdown. However, Democrats reject Trump border wall proposal. They insisted Trump needs to open government before any negotiations over border security or barrier funding. Although Trump signed the provisional spending bill last Friday, the longest government in the history of the United States officially ended. If Congress and Trump can not reach a further agreement in the next three weeks, the US government may shut down again in mid-February.
So far, the shutdown has been viewed by investors as political chaos and has not much impact on the markets. But the longer it goes on, the more it could hurt the economy and consumer confidence. We can see the Michigan consumer sentiment index fell a sharp 7.6 bps to 90.7 in January. Tax cut effect seems to fade away.
University of Michigan Consumer Sentiment Index
Data Source: iFund; Bloomberg
Trade deal bias to positive result
The outlook on trade negotiations looks more positive as the deadline approaches. Based on the Bloomberg quoting from people familiar with the matter, China proposes to increase the annual import U.S. goods by more than 1 trillion in six years, with a view to eliminating trade surplus with the U.S. by 2024.
However, China and U.S. have not been able to make progress on intellectual property issues so far, and this may be a key point in determining whether Trump can finally finalize the agreement with China. On the other hand, some damage has already been done. Supply chain disruptions and profit pressure on consumer electronic companies need some tome to improve.
We expect political uncertainty will remain elevated all year. So valuation of U.S. market can not recovering to the prior highs. We also emphasizing diversify allocation in 2019, especially emerging market, which benefit from China’s recovery and an improvement in trade relations.