Equity markets continued their upward momentum this week, on the back of a contained response to the Iran conflict, positive data reads, and news that China’s top negotiator would be in the US next week to sign the Phase One deal. The situation with Iran remained the focus of investors this week, as they tried to determine what the next steps would be in the showdown. Markets proved remarkably resilient during the turmoil, shrugging off concerns, and rallying higher after it appeared Iran was backing down from a larger engagement. The situation remains somewhat precarious, however, and we should not believe we are completely out of the woods yet with Middle East tensions running hot. Gold prices also skyrocketed this week to the highest since 2013 on fears of war, as some investors fled to safer assets.
Belying all of the headline drama out of Persia, economic data appears to be firming around the world. US services activity picked up in December to the highest since July on robust demand, and remained firmly in expansion territory. Manufacturing still appears to be on rocky ground though, with factory orders falling slightly and continuing the pullback seen through much of last year. Perhaps the most key indicator to watch, employment, is holding up very well with the ADP December jobs report exceeding expectations by a large margin, and hopefully Friday’s government non-farm payroll report will also show strength in the labor force. Also fueling the optimism in risk assets, US consumer comfort rose to a 19 year high. Most market participants are now expecting a modest growth pick up throughout the year, as consumer spending continues to provide the backdrop for a healthy US economy and manufacturing looks to be bottoming out globally.
As mentioned previously, we are in the process of completing a full-scale review of our allocations and will be implementing changes in the coming weeks. Our main focus is on preserving a pro-risk stance at this time while also being prepared for volatility from the upcoming US election this year. US stock prices are precariously high at this time, with most technical indicators flashing warning signs that equities have moved too far too fast. However, given the market’s ability to look past the recent Iran situation, it is possible that another year of smaller price swings could be ahead. Many have pointed to ongoing liquidity being provided to markets by the Federal Reserve in recent months, which is set to continue at least through mid-year. That, in addition to lower rates globally, have set up an environment where lower yields should support risk taking by investors and dampen volatility. We prefer to be more cautious in this late cycle environment though, as the past several years have experienced significant drawdowns that we must be prepared for, and greed should not be allowed to overtake prudence. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.