1Q 2020: Corona Fallout

As news broke of a viral epidemic in China, global markets fell sharply, and analysts struggled to assess the economic fallout. The current statistics of the virus are staggering with over 6,000 cases of the coronavirus found in 17 countries, 132 confirmed deaths, and known cases of human-to-human transmission seen in four countries. China has locked down 15 cities, including the epicenter Wuhan, and is quarantining a population of nearly 60 million people in an attempt to stop the spread of the disease. The US and other nations are screening passengers arriving from China, particularly from Wuhan; while Hong Kong and some Russian provinces intend to close their borders with China entirely. There are five confirmed cases in the US, with an additional 100 people being tested in 26 states. Although the incubation period is still under study, the good news is that scientists and doctors have been able to define the coronavirus genome and believe it is more similar to influenza than SARS. This is very promising since influenza has a substantially lower mortality rate than SARS. Equally important, the 2003 SARS experience has provided a guideline for countries on containment methods and the process needed to develop a testing kit and vaccine.

After a dramatic sell-off in response to the crisis, stock prices rebounded, but investors remain concerned about the longer-term ramifications of this outbreak. The crisis may be too young to quantify, but in our opinion most modern-day epidemics are “economically” similar to natural disasters such as earthquakes, hurricanes and fires. There is a sharp negative economic impact in the short run as normal economic activity grinds to a halt, but the economy tends to rebound and recover what it lost during the crisis in subsequent quarters. And in most all circumstances, the economic trend that was in place prior to the epidemic or disaster, resumes once the crisis abates.

The measures being taken to control the spread of the coronavirus suggest the impact of this crisis will be contained primarily to China and other parts of Asia. However, since China is the second largest economy in the world and is also a major manufacturer and supplier to many industries, the longer the crisis continues the greater the fallout could be on the global supply chain. Nonetheless, the biggest near-term economic impact is expected to be seen in airlines, hotels, casinos and energy stocks due to canceled travel plans. But business and leisure travel should resume once the epidemic is in check. In sum, the epidemic is apt to have a significant impact on China in the first quarter and a more modest impact on the global economy. 

Earnings are Crucial
We believe fourth quarter earnings season could soon overshadow the coronavirus as a market influence. There are 141 S&P 500 companies reporting this week and we expect the impact of the virus will be a major topic on earnings conference calls. To date, 68% of the companies that reported have exceed expectations, but it is earnings guidance regarding the first quarter that will have the biggest impact on earnings growth expectations for 2020. In that regard, this week’s earnings report from Apple Inc. (AAPL – $317.69) is quite encouraging. Apple is a high PE growth stock with a large exposure to China in terms of both production and customers. However, not only did Apple’s current quarter beat holiday revenue expectations and consensus earnings estimates, but the company announced revenue forecasts for the quarter ending in March that exceeded current analysts’ estimates. CEO Tim Cook told reporters that due to the coronavirus the company was using a wider range than normal for its quarterly guidance, but Apple has the flexibility to use suppliers outside of the Wuhan area if necessary and its current revenue estimates include the delayed start of Chinese factories after the Lunar New Year holiday and reduced hours at many of its Chinese stores. This is good news and it bodes well for technology earnings in general for 2020.

Fed on Hold
This week marks the first FOMC meeting of the year and we expect the Federal Reserve will keep interest rates on hold. In large part, the current economy is the perfect combination of “not too hot” and “not too cold.” Inflation has been well contained in recent years which means there is no pressure for the Fed to raise rates. The economy is also sufficiently robust that monetary stimulus is not required. However, it is noteworthy that the Fed has been expanding its balance sheet for a number of months. The Fed has stated that this is due to an increase in global demand for US dollars and in order to keep the fed funds rate stable the Fed has had to supply US banks with more liquidity. To do this, the Fed has been buying Treasury bills and short-term Treasuries in the open market and its balance sheet has grown. According to the Fed, this is a temporary change to its longer-term strategy of normalizing its balance sheet. But in terms of the impact on the banking system it is stimulus.

Brexit is Here
This week also includes the formal exit of the UK from the European Union. January 31, 2020 will also mark the start of an 11-month transition period during which the UK will follow all member guidelines while it begins the process of creating new regulations with the EU on trade, security issues, legal rights, data sharing, fishing water rights, aviation standards, electrical and power supplies and the licensing and regulation of medicines. Many are skeptical about the outlook for the British economy after Brexit, but we believe the UK may fare much better than most experts expect. In fact, we believe the UK could begin to rebound now that the uncertainty of Brexit is over, and the country has the ability to control its own economic destiny. If we are correct, this would be a positive for the global economy. 

2020 Review
Despite the killing of Iranian Major General Qassem Soleimani, the impeachment of President Donald Trump, the downgrade of global growth forecasts by the International Monetary Fund and the coronavirus outbreak, we see no reason to change our outlook for 2020. Our SPX target of 3300 is unchanged in the near term, but we remind readers that our valuation model allows for the possibility of SPX 3500 later in the year. However, it is has been our view that to move the equity market substantially above SPX 3300 it would require greater earnings confidence and more political clarity. Both could materialize later in the year. Meanwhile, our bullish long-term view is supported by a strong economy that includes record low unemployment, solid wage growth in excess of 3% year-over-year, near record high consumer confidence, strengthening household balance sheets and renewed vigor in the housing market. All these factors will support equity prices in 2020.

From a technical perspective, this pullback appears to be a normal and healthy pause in a bull market cycle. The indices continue to trade above key support levels and the NYSE cumulative advance decline line made a record high on January 17 in line with the record highs in the indices. In short, this suggests that the bull market remains intact and pullbacks represent buying opportunities.

Gail M. Dudack
Market Strategist

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Disclosure: The information herein has been prepared by Dudack Research Group (“DRG”), a division of Wellington Shields & Co. The material is based on data from sources considered to be reliable; however, DRG does not guarantee or warrant the accuracy or completeness of the information. It is published for informational purposes only and should not be used as the primary basis of investment decisions. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. The opinions and estimates expressed reflect the current judgement of DRG and are subject to change without notice. Actual results may differ from any forward-looking statements. This letter is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity.
This communication is intended solely for use by Wellington Shields clients. The recipient agrees not to forward or copy the information to any other person without the express written consent of DRG.
Copyright © Dudack Research Group, 2020.
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US Strategy Weekly: Emotional Roller Coaster

A week ago, the world was on edge after the US took out Iranian Major General Soleimani in a drone strike at the Baghdad airport. Luckily Iran’s retaliation was minor and the political uproar that followed this bold and unforeseen event seems to have dissipated. Nevertheless, the first few weeks of 2020 have been an emotional roller coaster for investors, and we believe the year will continue to be marked by more unexpected political incidents. The predictable narratives are the Democratic primary election, the presidential election and Brexit; but these are only the obvious ones. Investors should stay on their toes while keeping a solid focus on fundamentals. 

Currently the financial press is dominated by more mundane economic stories such as the content of this week’s Chinese-US phase one trade deal and the positive earnings results reported by several large US banks. JPMorgan Chase (JPM – $138.80) reported a 9% increase in revenues in its fourth quarter. Citigroup (C – $81.91) reported a 7% increase. Chase reported their credit card, merchant services and auto revenue surged $6.3 billion or 9% at year end, with credit card loans up 8%. Citi beat profit estimates due to a jump in trading revenue and strong credit card sales. These revenue and earnings increases paint a favorable picture for fourth quarter GDP which will be released at the end of this month. Economists will get another clue to fourth quarter activity when December’s retail sales are released later this week. The consensus is looking for a 0.4% month-over-month gain in total sales versus the 0.2% recorded in November. Anything stronger would be an excellent sign that the consumer is doing better than expected. Wall Street is forecasting GDP growth of 1.6% in the fourth quarter, but it is worth noting that the consensus has been too pessimistic all year. The combination of a stronger-than-consensus fourth quarter and a signed phase one US-China trade deal could set the stage for a big positive surprise in the first quarter of 2020. 

TARGET TWEAKING 

In our OUTLOOK FOR 2020 (December 18, 2019) we noted that our SPX earnings forecast of $184 and our price target of SPX 3300 could prove too conservative. We are not surprised that equities are closing in on our SPX 3300 target this week. Yet since it is, we should remind readers that the top of our valuation model’s predicted range allows for a much higher target of SPX 3500 by December 2020. But SPX 3500 would require a perfect combination of strong earnings, low inflation, an accommodating Fed, and no upsetting political or geopolitical events. And while this is not impossible, we believe it is likely that the SPX 3300 level becomes upside resistance in the near term. Even so a signed trade deal, better than expected fourth quarter SPX earnings and a GDP report of 2% or more for 4Q19, could lead us to raise our target in coming weeks. 

A FEDERAL RESERVE ON HOLD 

Recent data releases suggest the Federal Reserve should be on hold for the foreseeable future. Employment in December was healthy, but not particularly strong. The 145,000 increase in payrolls was well below the 6-month average of 188,500 new jobs per month. And while the unemployment rate fell fractionally, it still rounded to 3.5%, or unchanged from November. Average weekly earnings for total private employees rose 2.3% YOY, down from 2.8% YOY in November. Average weekly earnings for production and nonsupervisory employees rose 2.4% YOY, down from 2.8% YOY in November. 2222 

Our favorite employment statistics are the annual growth rates in the number of people employed. In December, employment increased 1.4% YOY in the establishment survey and 1.3% YOY in the household survey. Both of these gains were slightly below their respective long-term average growth rates. Still, it is difficult to criticize these growth rates since the current expansion is now 10 ½ years old. Slow and steady is usually a better long-term trend than fast and extreme. Over 2.1 million jobs were created in 2019 and the number of unemployed workers receiving unemployment insurance fell by 533,000. These are all favorable numbers; but in our view, the most impressive statistics in December’s job report were not the headline data points. The percentage of those currently not in the labor force but wanting a job fell from 5.3% in December 2018 to 4.8% in December, after hitting a record low of 4.6% in October 2019. Discouraged workers, or those out of work who feel they will not be able to find work, fell to 277,000 in December, the lowest level since September 2007. These latter data points suggest the job market has definitely become healthier in 2019. See pages 3 and 4. 

The NFIB Small Business Optimism Index fell from 104.7 in November to 102.7 in December. This decline reversed some of the gains seen in the prior two months, yet the index remains generally strong. There were small declines in plans for capital expenditures, employment expansion, job openings, compensation increases, general expansion, and price increases. But there were small increases in the percentage of respondents that expect the economy and real sales to improve in the next twelve months. See page 5. 

December’s inflation data also supports the Federal Reserve’s neutral standing. December’s not-seasonally-adjusted CPI index showed a 2.3% YOY rise, which was just slightly higher than the 2.1% YOY gain seen in November. Meanwhile, core CPI was unchanged from November’s 2.3% YOY pace. Energy prices fell 0.8% for the month but rose 3.4% YOY. Food was up 0.1% for the month and up 1.8% YOY. See page 6. Of the largest components of the CPI, transportation, with a 16.4% weighting, tends to be the most volatile due to the erratic price of oil. For example, transportation prices rose 1.9% YOY in December after falling for three consecutive months. But medical care, with an 8.8% weighting, is the most concerning. Medical care had the largest year-over-year increase, up 4.6% YOY in December. The major driver of recent medical care inflation is health insurance, where prices have been increasing 20% YOY or more for three consecutive months. See page 7. 

Conversely, housing, which carries a 42.3% weight in the index, has been decelerating from a 3.0% pace to 2.6%. This has helped to dampen inflation trends. Prices for rent of primary residence, owners’ equivalent rent and household furnishings and operations are all slowing. This is favorable for consumers and should help keep headline and core inflation indices rising modestly between 2.0% and 2.3% for 2020. See page 8. 

TECHNICAL INDICATORS HOLD STRONG AND STEADY 

The 25-day up/down volume oscillator is 2.87 (preliminarily) and neutral after being in overbought territory for 11 of the last 15 consecutive trading sessions. This overbought reading, which began in December, represented the sixth consecutive overbought reading of 2019. Strong and repetitive overbought readings reveal solid and persistent buying pressure and are a classic characteristic of a bull market cycle. In short, this is a positive sequence for this indicator. See page 11. Breadth data continues to be strong and favorable. The 10-day average of new highs rose to an average of 343 this week, while the average number of daily new lows fell to 35. The NYSE cumulative advance decline line recorded a new high on January 14, which confirms the new highs recorded by most of the popular averages last week. See page 12. Equally important are the lack of extremes in sentiment. As of January 8, AAII bullish sentiment fell 4.1% to 33.1% and bearish sentiment rose 8.0% to 29.9%. The 8-week bull/bear spread remains neutral. The ISE Sentiment index which measures option sentiment is also neutral. In sum, sentiment indicators are not giving early warning signals of a peak in the market.

December’s payrolls increased by 145,000 workers, previous months were revised lower by 13,000 and the unemployment rate fell fractionally, but still rounded to 3.5%. See below. Employment grew 1.4% YOY in the establishment survey and 1.3% YOY in the household. Both of these paces were slightly below the long-term average employment growth rate; however, the job market remains robust considering the expansion is currently 10 ½ years old. 

Regulation AC Analyst Certification 

I, Gail Dudack, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific views contained in this report. 

IMPORTANT DISCLOSURES 

RATINGS DEFINITIONS: 

Sectors/Industries: 

“Overweight”: Overweight relative to S&P Index weighting 

“Neutral”: Neutral relative to S&P Index weighting 

“Underweight”: Underweight relative to S&P Index weighting 

Other Disclosures 

This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment. The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein. Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes. Accordingly, an investor may receive back less than originally invested. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. 

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The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000. 

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2019 Fourth Quarter Review – Welcome to the New Year

What a difference a year makes. A year ago market volatility, an escalating trade war, a hit to capital spending, and an inverted yield curve seemed to be moving simmering concerns about a global recession toward a full boil. Low inflation, however, gave the Federal Reserve and other central banks room to maneuver. The central banks eased monetary policies, liquidity surged with real U.S. GDP growth stable at roughly 2%, and the equity markets closed at an all-time high.

As we enter the new year, some uncertainties have been cleaned up—and replaced by new ones. As we asserted would be the case in our April 2019 letter, predictions of an imminent recession proved to be inaccurate.  We also have more clarity as a result of a treaty soon to be signed between the U.S., Canada, and Mexico, a Phase I agreement with China, and a decisive vote on Brexit. That said, the possibility of making further progress with China remains unpredictable, impeachment proceedings and elections loom, and a new threat of conflict in the Middle East has emerged.

A U.S. soft landing, not a recession, remains our best forecast for 2020. First-quarter GDP will undoubtedly be weak in the U.S. as the announced Boeing production cuts reduce growth. We assume the Boeing hit to the economy will be temporary and the remainder of 2020 has enough strength to avoid further deterioration. Consensus is that GDP growth should again come in around 2% for the year, corporate profits should rise 6-to-8%, accelerating as the year goes on. The global economy outside the U.S. already shows some signs of picking up. Global bond yields are moving higher with Chinese industrial production and retail sales increasing year-over-year in November.

From an equity standpoint, the defining moment for us was the complete reversal of Federal Reserve policy from tightening to one of accommodation and a fresh injection of liquidity. This policy would also appear to be global with China’s central bank lowering its reserve requirement ratio by 0.5 percentage points, effective January 6th. Easy money, rising profits, relatively full employment, and low inflation are the ingredients for rising equity prices, and we would expect further progress in the new year. Our biggest fear would be a rise in inflation which could cause central banks to reverse their current monetary policy.

We wish all our clients and friends a healthy, happy, and prosperous new year.

January 2020

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From black to white … in the world of swans.

DJIA: 28,957

One can only hope it’s back to business, literally. Business doesn’t seem so bad if the stock market is the guide it’s supposed to be. While last year we had to wake up to the threat of new tariffs most days, it would be pleasant if this year we don’t have to wake up to new attacks somewhere. No doubt plenty of trouble may still come from the Middle East, but the Tuesday-Wednesday events seem to mark Phase I of a peace deal. Now the stock market can go along its merry way seemingly toward some euphoric binge. Already in a bubble for more than a year, the NASDAQ managed to further surge 76% from October 7, 1999, until its March 10 peak in 2000. As it happens, back then the Federal Reserve flooded the market to prevent any disruption from the “Y2K” bug. The moves it has made in the last few months following the September seizure of the repo market are proportionately just as big, according to Bloomberg’s John Authers.

Speaking of 2000, some measures of sentiment are back to those happy days. Options are one thing, leveraged options quite another. Speculative activity in leveraged instruments has risen dramatically in the last month, with one of the biggest spikes since 2000. Meanwhile, those ETFs protecting against a fall are losing assets. During dynamic uptrends, traders tend to pile into leveraged funds faster than they have the inverse funds, according to SentimenTrader.com. Over the past month, the long funds have gained more than 15%, while the short funds have lost more than 10%. Every time since 2010 spreads were this wide, returns weren’t all that bad—after all, the trend was up. Short term, however, the next 1-to-3 months, the S&P’s median was below a random return. We could look at call buying alone and get pretty much the same picture. These sentiment measures are simply telling us what we already know—things have gotten frothy. Sentiment gives you an insight into risk, but it’s not a timing tool. When those A/D numbers change, then worry, and maybe a lot.

Momentum numbers like the advance/declines still have the market’s back. Another measure we favor is stocks above their 200-day moving average, that is, stocks in medium-term uptrends. For the S&P, this measure nudged above 80% a few days ago, its highest level in a year. So much for the “unwind” in momentum characteristic of bull market tops. As is often the case, when it comes to all stocks on the NYSE, they’re lagging a bit at a recent peak of only 68%. We take this to mean the large-cap stocks of the S&P simply are outperforming NYSE stocks taken as a whole—not unusual. As long as those A/D numbers hold together, we don’t see this as an important divergence, and hopefully one soon corrected. When coming from an oversold level as it did last year, a move above 60% of NYSE stocks above their 200- day has been followed by above-average returns in the S&P. Spikes to 70% marked new bull markets in 1995, 2003, 2009, 2013 and 2016.

One technician’s top is another’s consolidation. We’ve worried for some time just what those FANG stocks were up to, especially Facebook (218) and Amazon (1901). Just two weeks ago Amazon looked particularly risky, but managed to dramatically move higher on 12/16. This kind of surge of itself often means higher prices, moving the stock, as it did, above some four months of trading. The stock, like Netflix (336), has gone nowhere since the end of 2018, so the consolidation/top issue remains unresolved. It is, however, much easier to give the stocks the benefit of the doubt. Meanwhile, both Facebook and Google (1420) have made it pretty clear their respite since 2018 was just a consolidation. On the whole, we can see all four on their way back to the good old days, even if not quite the FANG of old. If the volatility here seems a bit too much, we would note that over 40% of the Communications Services ETF (XLC-55) is Facebook and Alphabet.

The war hedges—Gold, Oil, Defense stocks—came undone on Wednesday. Gold and the Defense stocks have particularly good charts and may have to settle-in, so to speak, but should be fine. Energy is trying, and trying in more ways than one. As for the hedge aspect, clearly fears eased Wednesday, but when isn’t the devil dancing in the Middle East? To assassinate the second most powerful person in Iran seems to have taken things to a new level. For now, the market agrees with Trump—all is well. Wednesday was the first time in the history of the S&P futures that they fell to a multi-week low and rallied to a 52-week high in the same session—Tuesday night and Wednesday. Lesser reversals generally led to higher prices. The positive seasonality will begin to fade, some prices are becoming stretched and sentiment is over the top. The Advance/Decline Index, however, just hit a new high—not how markets get into trouble.

Frank D. Gretz

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US Strategy Weekly: 2020 vs 1991

The new year began with a US drone strike at the Baghdad airport which killed Iranian Major General Qassem Soleimani and Iraqi militia leader, Abu Mahdi al-Muhandis, who had greeted him at the airport. To the extent that Iran retaliates and whether this is the start of an escalating conflict in the Middle East is a huge unknown. But it certainly could become the overriding issue of 2020. Still, it is important to note that history shows that stocks have performed surprisingly well during military conflicts. For example, equity prices rose in 1991 even though the US began a military operation – Operation Desert Storm – in January to expel Iraqi forces from Kuwait. (An interesting connection between 1991 and the current operation is that Muhandis had been labeled a terrorist and sentenced to death by a Kuwaiti court for the 1983 bombings of the American and French embassies in Kuwait.) 

Another significant factor to consider with regard to the Middle East is that the US has recently become the world’s largest energy producer. In 2018 the US delivered 18% of the world’s total oil production exceeding Saudi Arabia’s 12%. In November, the US had a petroleum trade surplus of $0.8 billion, the highest on record. This is an important difference between 1991 and 2020 since the US is now a greater force in global energy production, has become a more energy efficient economy and currently benefits economically from the rising price of oil. A rise in oil prices could also increase corporate earnings for energy companies and boost S&P 500 earnings. All of this could explain why the US equity market has performed better since the drone attack than many would have expected. 

WHAT HAS CHANGED? 

Although the geopolitical landscape is quite different today from when we published our 2020 outlook in December, there is little that we would change in our forecasts. The SPX is trading at 20 times trailing operating earnings this week, the same multiple as seen in mid-December. Our earnings forecast of $184 is likely to be too conservative, particularly if energy sector earnings rebound more than expected in 2020. And in turn, we believe our SPX price target of 3300 (PE multiple of 17.9 times) could prove to be too conservative. However, given the uncertainty that the Middle East now poses, it is possible that the SPX 3300 level will be a hurdle in the intermediate-term, or at least until the risk of conflict subsides. Conversely, sell offs related to the Middle East should be viewed as longer-term buying opportunities. As we go to print there are reports that there are rocket attacks on multiple US facilities in Iraq and US equity futures are down 1%. 

ASSESSING ECONOMIC STRENGTH 

The majority of recent data releases indicate that economic activity is improving. November’s trade data pointed to a goods-only trade deficit that declined 5.8% to $63.9 billion and a total trade deficit that fell 8.2% to $43.1 billion. Both of these monthly figures are the lowest deficits recorded since October 2016. The petroleum surplus mentioned earlier, contributed to the declines in deficits. Most importantly, the trade deficit as a percentage of GDP is ratcheting lower which means it could be less of a drag on GDP in future quarters. Last but far from least, trade with China continues to decline and Mexico and Canada remain our number one and two trading partners. See page 3. 

One of the most promising segments of the US economy is housing. Pending home sales – a leading indicator of single-family home, condo and co-op sales – rebounded in November despite a shrinking 2222 

level of available inventory. This report was accompanied by large jumps in building permits and housing starts, which are now at their highest levels in twelve years. See page 4. Since pending home sales are based upon signed real estate contracts, November’s report suggests that existing home sales and prices should rise in the first quarter of 2020. See page 5. 

Given this housing backdrop it is not surprising that home builder confidence is also rising. In November, the NAHB housing market index was approaching levels last seen in 1999. This is good news for the stock market. Housing is an important part of the US economy and the trickle-down effect from new and existing home sales is influential to many other parts of the economy. Therefore, it is not surprising that the NAHB housing market index and the SPX are strongly correlated. As seen on page 6, with the exception of 2006 and 2007, homebuilder confidence has moved in close step with stock prices. In fact, the weakness in the NAHM index in 2006-2007 was an excellent, although early, predictor of the mortgage crisis that led to the financial crisis in 2008. 

In our OUTLOOK FOR 2020 (December 18, 2019) we outlined the strengths we see in the household sector which included a healthy job market, solid gains in real wages, record household net worth, homeowners’ equity of 64% (the best since 1991), and debt service ratios that remain at or near 40 year lows. Recent data on personal income and personal expenditures also point to a strong consumer base. In November, personal income grew 4.85% year-over-year and personal disposable income rose 4.6% year-over-year. And despite the increase in the CPI from 1.8% to 2.1% in November, our calculation for real personal disposable income showed an increase from 2.4% to 2.5%. In short, purchasing power continues to improve. The cyclicality in personal consumption is another encouraging factor for the US economy. As seen on page 7, PCE tends to decline and hit a low every two to four years. There were cyclical slumps in personal consumption in 2009, 2013, 2015 and in 2019. However, the slump in 2019 is now a good omen for 2020 since it implies there should be a rebound ahead. 

Not everything is bright for the US economy. The ISM manufacturing index fell from 48.1 in November to 47.2 in December, recording its third consecutive decline and its fifth consecutive reading below 50. The manufacturing sector continues to be in the doldrums. Conversely, the ISM nonmanufacturing index rose from 53.9 to 55.0 in November. The employment survey in each ISM series edged lower in December but since the unemployment rate is low, we are less concerned about these employment indices than we were. More importantly, the nonmanufacturing employment index was 55.2 in November, a level that indicates expansion. Keep in mind that nonmanufacturing represents 80% of the US workforce. See page 8. 

TECHNICAL INDICATORS REMAIN BULLISH 

One of the most bullish indicators we monitor is the 25-day up/down volume oscillator. This indicator is an excellent barometer of underlying buying and selling pressure and it helps us determine if a bull or bear market is strong, getting stronger or running out of steam. The oscillator is currently 2.84 and neutral this week but it was in overbought territory for 7 of 8 consecutive trading sessions at year end. This represented the sixth consecutive overbought reading (without an intervening oversold condition) in 2019 and is distinctly bullish. The cumulative advance decline line made an all-time high on January 6, which confirmed the new highs seen in the indices on January 2. And since the equity market has been setting a series of record highs, we plan to monitor sentiment indicators more closely. Sentiment indicators tend to be an early warning system for extended bull market cycles since extreme bullishness usually accompanies bull market peaks. The good news today is that sentiment indicators are not recording high levels of optimism. The AAII bullish sentiment reading for January 1 was 37.2%, down 4.7% from the previous week. Bearish sentiment rose 0.3% to 21.9% in the same week. The ISE Sentiment index edged toward positive territory but was also in neutral territory this week. In sum, there are no extremes in the technical arena that would suggest that the bull market advance is over. All in all, this suggests that future market weakness should provide investors with a favorable buying opportunity. 

Regulation AC Analyst Certification 

I, Gail Dudack, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific views contained in this report. 

IMPORTANT DISCLOSURES 

RATINGS DEFINITIONS: 

Sectors/Industries: 

“Overweight”: Overweight relative to S&P Index weighting 

“Neutral”: Neutral relative to S&P Index weighting 

“Underweight”: Underweight relative to S&P Index weighting 

Other Disclosures 

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