Weekly Market Update (November 25 – November 29, 2019)

The U.S. and Canadian stock markets hit another all-time high last week – the S&P 500's 26th of the year -- on continued optimism that the US and China are making progress toward a "Phase 1" trade deal. Fresh data also showed the North American economy remains on sound footing with better than expected U.S. initial jobless claims and a rise in October U.S. personal spending, signaling consumers remain in fairly healthy shape heading into the holiday season. Meanwhile the latest Canadian GDP report revealed that the domestic economy expanded at a 1.3% pace in the third quarter. Encouragingly, business and housing investment each rose, along with a modest increase in consumer spending, which helped offset the drag from trade activity.

With last week's U.S. Thanksgiving holiday, the market continues to make a convincing case for its inclusion on a list of things to be thankful for. Both the stock and bond markets are having a banner year, including the strongest TSX gains in a decade and the best year for the S&P 500 since 2013. While we can certainly appreciate this year's performance, investors shouldn't take it for granted. We think conditions remain sufficiently nourishing for an extension to the bull market, but not without bouts of indigestion.

U.S. Thanksgiving marks a turn into the homestretch for the year and shifts the attention to the holiday shopping season. With that in mind, we've dished up some holiday perspectives on market performance and the role the consumer is likely to play. 

Turkey-day track record

• The stock market has historically done well after the U.S. Thanksgiving holiday. Since 1950, the average return in December has been 1.5%, with the market logging a post-holiday gain in 81% of those years¹. When the market rose between Thanksgiving and year-end, it went on to deliver a positive return the next year 77% of the time¹.  Finishing the year on an up note tended to be part of a broader move that saw market gains continue. 
• In the last 70 years, the market has come into U.S. Thanksgiving with a year-to-date gain of 20% or more 18 times, including this year. The average return in the following year was 16%¹. While trees don't grow to the sky and we don't anticipate gains of that magnitude in 2020, this demonstrates that strong years don't have to be followed by disappointing ones.
• Historical performance over short periods of time are not a predictor of future performance, but Thanksgiving in the States comes at a time in the year that offers an ability to take stock of market conditions and trends and assess what they mean for the broader path ahead. We think 2019's rally is reflective of the still-positive fundamentals underpinning this market.    

Consumers in control

• Despite rising recession worries last December and again this August, we have maintained our stance that an economic downturn is not imminent. This is predicated on our view that the economy will ultimately go where consumers lead it.  After all, nearly 60% of domestic GDP and 70% of U.S. GDP is household spending, and against the current backdrop of historically low unemployment, rising wages, and reasonably healthy confidence, consumer spending is poised to rise again next year.
• U.S. Thanksgiving typically ushers in the holiday shopping blitz with Black Friday.  While still an important (and symbolic) day, consumer spending habits are evolving. More consumers are shopping outside of the traditional holiday window and are buying more online, giving rise to the prominence of Cyber Monday. As a result, retailers are offering deals earlier, and shoppers are shopping outside the traditional window because this year there are six fewer days between U.S. Thanksgiving and Christmas. A National Retail Federation (NRF) survey showed that, on average, consumers have already completed 24% of their planned shopping, compared with 16% at this same time 10 years ago. More importantly for the economy, NRF data also show that consumers expect to spend 4% more this year compared with 2018. 
• The bottom line: consumers are in a good position, which we think will extend this economic expansion. That said, we'd note that elevated Canadian household debt levels are a headwind, in our view, and will contribute to more modest spending and economic growth in Canada versus the U.S. For example, the third-quarter Canadian GDP report released last week showed the domestic economy grew by 1.3% last quarter, with consumer spending rising by 1.6%. This compares to nearly 3% consumer spending growth in the U.S. during that period, which we believe reflects the difference in household debt levels and the trajectory of the housing markets. Holiday shopping is a single but important measure of the outlook for consumption. In our view, consumption will form the foundation for moderate growth in the coming year. 

A good recipe, but watching for a sugar high

• The recipe for the recent rally should support markets again in 2020… The current combination of positive GDP growth, modestly rising corporate profits, and supportive central bank policies will, in our view, persist next year. Historically, the combination of positive trends in these fundamentals has been consistent with favourable market returns.
• …but future gains may not be quite as sweet.  The pendulum of market sentiment has swung firmly into optimistic territory lately. Fears of a recession have dissipated, comfort with the U.S. Fed's interest rate plans has increased, and the expectations of a "Phase 1" trade deal between the U.S. and China have firmed. We doubt these prevailing market views will remain as confident or in concert as we progress into 2020.  To us, this doesn't mean the bull market is facing its demise, but it does mean the recent exceptionally low stock-market volatility and the 20%-plus annual gains won't be replicated as we advance.

Craig Fehr, CFA
Investment Strategist

^{Sources: 1. FactSet, S&P 500 index total return.  2. Federal Reserve Board}

^{FacSet, 11/29/19. *4 day performance ending Thursday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. .}

Important economic data being released in Canada include employment and unemployment numbers, labour productivity and the Bank of Canada overnight rate target.