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Positive momentum on trade discussions with China lifted equity indexes to new all-time highs
The month of November was primarily dominated by trade related headlines as the consensus narrative was building towards the possibility of a phase one trade deal between the U.S. and China. Over the past two years the U.S. has imposed 25% tariffs on $250 billion of Chinese imports and 15% tariffs on an additional $110 billion of goods. With a December 15 deadline for new tariffs to be put in place, investors were eager to see some progress made on the trade negotiations. An expectation of some tariffs being rolled back helped fuel equity markets to new all-time highs. Market sentiment has improved remarkably from a few months ago, and we have to suspect that many investors have ultimately backed away from the doom-and-gloom scenario as trade discussions have progressed, corporate earnings were upbeat, and economic data appears to be bottoming. Overall, against this backdrop where an immediate recession is off the table, we could envision further marginal upward pressure on both rates and equities.
Recession risks have receded and the weakness in manufacturing appears to be bottoming
There have been nascent signals that global manufacturing weakness has started to form a bottom with the PMI data ticking higher in November. The manufacturing PMI figure surprised to the upside in November, coming in at 52.6 from 51.3. A PMI Index with a reading above 50 is generally considered to indicate expansion within the sector. Interestingly, while other manufacturing data has suggested the sector may be contracting, the PMI index suggests manufacturing is rebounding, with its last three prints increasing month-over-month. Overall, the PMI data is a welcomed sign that activity in the manufacturing sector may have bottomed recently.
The consumer is heading into the holiday spending season with elevated confidence and the wherewithal to spend
Despite the weakness witnessed in the manufacturing sector, consumption in the U.S. has remained quite resilient and, in a large part, has kept overall growth in the economy running at trend. The holiday season is upon us, and the consumer is equipped to spend as measures of consumer sentiment have rose to the highest level since July. The University of Michigan Consumer Sentiment Index rose to 96.8 in the final reading of November and was much improved from the weaker readings last summer. Concerns over trade and tariffs have declined from a consumer perspective, and in addition, it appears the recent impeachment hearings have had no bearing on consumer’s attitude. Against a backdrop of low gas prices, low unemployment, and an elevated stock market, we would expect healthy consumer sentiment to remain the norm. Consequently, we expect some strong holiday sales results to underpin growth output for the fourth quarter.
We are cautiously optimistic with the current state of the economy as we head into the New Year
While there are some downside risks still present, recent Fed easing, positive rhetoric on global trade, and a well-equipped consumer creates a path to extend the current expansion beyond what was previously thought.
The views expressed above reflect the views of Allianz Investment Management LLC, as of 12/2019. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America.