Markets Running Hot, Hot, Hot

On the heels of the State of the Union address Tuesday night, equity futures are pointing to modest decline at the open of trading on Wednesday. In assessing the SOTU address, we’re of the opinion it was rather innocuous with points of articulation that spanned from global trade to domestic political strife and found with sprinkles of economic data points. As our political parties will likely continue to bicker over the future implementations of legislature, the government is just 10 days away from the threat of another government shutdown. Investors have been increasingly accustom to focus on the political picture given the shortcomings in delivering of economic data since the last government shutdown that proved record-setting in duration. Since the government shutdown, dribs and drabs of December economic data have been slow coming. Some of the most important pieces of data are still unknown including monthly retail sales, Personal Consumption and Expenditures and Q4 2018 GDP just to name a few. Some of the data that has been delivered of late has proven favorable, but some of the data like factor orders shows signs of continued slowing.

Factory orders in the U.S. fell more sharply than expected in November showing a slowdown in growth in the industrial segment of the economy toward the end of 2018. A key measure of business investment also declined. Orders dropped 0.6% in November. Economists polled by MarketWatch had forecast a 0.2% decline, largely because of lower oil prices. The report had been delayed by the 35-day partial government shutdown.

A closely followed gauge of business investment, known as core orders for durable goods, declined by 0.6% in November. It was the third drop in four months, suggesting companies were more hesitant to invest. The ongoing trade spat with China has been a major source of uncertainty and worries about a recession were especially pronounced during a market slump near year-end.

Business sentiment is a driving force for factory orders and durable goods and much of the 2018 positive business sentiment had given way to capital preservation in the last few months of the year. Much of the blame for capital preservation centers on fears over global trade feuds and the domestic political feuding that resulted in the longest government shutdown in U.S. history.

“Fears of recession, the government shutdown, trade policy uncertainty, and slower global growth have likely dampened capital spending in December and January,” said chief economist Scott Brown of Raymond James. “The key question is whether this will prove to be a temporary lull or something longer-lasting.” 

While we can’t quite yet determine total retail sales growth for 2018 and for the aforementioned reasons, citing lack of December data, the National Retail Federation is out with their 2019 forecast. The NRF forecasts U.S. retail sales to rise between 3.8% and 4.4% to more than $3.8 trillion in 2019. The trade group and data tracker is citing high consumer confidence, low unemployment and rising wages as the main reasons for continued retail sales growth in 2019. Preliminary estimates show retail sales grew 4.6% in 2018 to $3.68 trillion, exceeding the retail industry group’s forecast for growth of at least 4.5 percent.

“More people are working, they’re making more money, their taxes are lower and their confidence remains high,” NRF President and Chief Executive Matthew Shay said in a statement. 

The biggest priority is to ensure that our economy continues to grow and to avoid self-inflicted wounds. It’s time for artificial problems like trade wars and shutdowns to end, and to focus on prosperity not politics."

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