Investment Market Update By Area
US Investment Market Update
by Joanne Roberts, Director, February 2020 (stats. to 31/01/2020)
The US equity market started the year on a positive note, extending the strong gains made in 2019 before succumbing to weakness in the final week of January. This was as a result of an outbreak of coronavirus in China, which knocked market confidence.
Fears surrounding the economic impact of the epidemic, which has been declared as a global emergency, pushed the US equity market marginally into negative territory by the end of January. In contrast, perceived ‘safe havens’ such as US Treasuries and gold rallied.
Concerns that global growth prospects could be harmed pushed commodity prices, led by oil and copper, lower. The energy and materials sectors in the S&P 500 index were the weakest performers with energy stocks enduring their worst January performance since 1990.
Airlines also had a tough month as US carriers such as Delta and American joined their European peers in suspending all services to China.
The chair of the Federal Reserve (Jerome Powell) expressed confidence in the US economy, which is supported by strong job gains and a confident consumer willing to spend. He also noted that global risks remain, for example coronavirus.
The US economy expanded at a 2.1% annualised rate in the fourth quarter of 2019. While a smaller trade deficit and increased home construction provided support, business investment continued to deteriorate. Meanwhile, the car workers’ strike at General Motors was a drag on the economy.
In their first meeting of 2020, the US Federal Reserve (Fed) left interest rates unchanged. The central bank suggested it would remain patient after cutting interest rates three times in 2019.
The US unemployment rate rose to 3.6% in January 2020 from the previous month's 50-year low and above market expectations of 3.5%. The number of unemployed people increased by 139 thousand to 5.89 million while employment fell by 89 thousand to 158.71 million. The labor force participation rate rose 0.2%. to 63.4%.
Jerome Powell (chair of the Federal Reserve) made cautious comments about inflation, which continues to fall short of the Fed’s 2% target. It has not hit that rate of change sustainably since the central bank formally adopted the goal in 2012.
Fed policymakers themselves do not expect it to eclipse 2% this year, based on their most recent set of projections.
Retail sales in the United States increased 0.3% month-over-month in December of 2019, following an upwardly revised 0.3% gain in the previous month and matching market expectations. Sales rebounded for food and drinks, clothes, and electronics and appliances and rose faster for gasoline. In contrast, sales of motor vehicles declined.
The Congressional Budget Office (Washington’s trusted fiscal watchdog) expects the federal government to hit the 23 trillion-dollar mark this year. At $23 trillion, the national debt already exceeds the size of the US economy.
The $23 trillion allegedly figure fails to account for massive unfunded obligations facing the US government through programmes such as Social Security and Medicare. This fiscal gap, which measures the difference between projected revenues and spending over the long-run, threatens future generations with ten times the current debt burden.
All of this is happening while America is experiencing one of the longest economic expansions in the country’s history with unemployment at historic lows, wages rising (especially for those with lower incomes), and an economy that continues growing and expanding despite headwinds.
It is unprecedented for the American nation to shoulder such high levels of deficits and debt at a time of relative peace and economic prosperity.
Federal debt that’s too high and rising compromises income growth, leaving everyone poorer. It increases interest payments that reduce spending on other priorities. It exerts pressure on interest rates across the economy, including for mortgages and loans. It also weakens the nation’s ability to respond to the next recession or emergency by leaving little fiscal space when it’s most needed.