December Outlook: Will Trade Bells Start Ringing As Shopping Season Kicks Off?

Last December, Wall Street looked like a forest thanks to all the bears prowling around. This December, things seem a little more jolly, with major indices beginning the month near all-time highs and the stock market on pace for its best year since 2013. The question is whether trade talks put that in peril or lend another boost in the weeks heading into 2020.

While trade is one major story to watch as the month gets underway, the shopping season could compete for attention. Consumers have hoisted the market on their shoulders for most of 2019, and December might help put the ribbon on the gift that keeps on giving if people flock to the stores (or to their laptops to buy online). It’s sometimes hard to get a pulse of just how strong the holidays are going until Q4 earnings arrive in January and February, but it’s possible we can get our first inkling in the early days of December as Black Friday and Cyber Monday sales results pour in.

Strong earnings results in late November from some of the more closely watched retailers, including Nordstrom, Inc. JWN, Walmart Inc WMT, and Foot Locker, Inc. FL, certainly helped bring a holiday glow. Things seem to be in pretty solid shape entering the new month and less than four weeks out from Christmas.

There’s more to December than shopping, naturally. As the month gets underway, investors face a Fed meeting, the steady pulse of trade headlines, political intrigue in Washington, and a scattering of key earnings reports even though earnings season is well behind us. Also, key data on manufacturing and employment kick off the month as many analysts remain concerned about softer business spending and its potential impact on jobs and wages.

While all that’s a mouthful that could keep people focused at least until mid-month when many scatter for the holidays, it’s still not the kind of gut-busting meal investors faced last December. Back then, the Nasdaq (COMP) fell into bear territory and the S&P 500 (SPX) came down 19% from its highs as the Fed tightened interest rates. That seems like a long time ago now, with the Fed reducing rates at its last three meetings and indicating it’s likely to keep them right where they are for a while to come. More about the Fed a little further down.

It’s Still All About Tariffs

Since trade has been the top of the news all year, there’s really no reason why the final month should be any different. Back about a month ago, there was a lot of excitement about chances for a “Phase One” agreement to get done by as soon as mid-November. Now November has come and almost gone with no deal amid jostling over China’s agricultural purchases and when U.S. tariffs might get eased. There’s talk in the media that no Phase One agreement might occur before 2020. That remains to be seen.

For now, Dec. 15 looks like the date to watch. That’s the deadline for new 15% tariffs on about $160 billion in China imports—including mobile phones and toys—and it keeps getting closer. If those tariffs take effect, there could be some repercussions on the market and on the U.S. economy. The U.S. consumer has been incredibly healthy with unemployment at 50-year lows, but there could be a day of reckoning later in December or after the new year if trade progress doesn’t get made and those consumer product tariffs take effect.

A couple of thoughts that might help put things in perspective: First, next year is an election year, so it seems unlikely that the U.S. would simply give up on making a deal. Another thing to remember is that these headlines we keep seeing about little disagreements are mainly positioning for the two contenders, like a playground fight where there’s a lot of tough talk without things happening one way or the other. If you avoid focusing on these little scuffles in a bigger war, you might be able to stop worrying as much about the day-to-day developments.

Sectors To Watch As Trade Battle Rages On

In the meantime though, certain sectors might stay super-sensitive to any trade developments in December. If the news on this front doesn’t improve over the course of the month, it could begin to weigh on Industrial, Technology, Materials, and Energy sector stocks, whose fortunes are tied closely to trade with China.

The semiconductor sub-sector of Technology also comes to mind. As of late November, this sector had outrun almost everything else in the market with year-to-date gains of 48%. Those gains could get pared back if the U.S. and China can’t make progress.

While the chip sector has seen some mixed earnings numbers over the last quarter, it also benefits from a lot of investor optimism about consumer demand. Those chips go into all kinds of devices, including (probably) the one you’re reading this on. If the global economy takes a turn for the worse or trade talks break down, chips might be the first to feel it. That certainly was the case back in May when trade negotiations withered and the chip sector took a dive. Chips are an exciting sector, but probably not one for the meek. Several analysts downgraded some of the chip companies in late November.

Some analysts see small-cap stocks as one way to track market sentiment on the tariff negotiations. Because small-cap companies tend to do more of their business here in the U.S. and don’t sell as much abroad, the thinking goes, they might have a better chance to stay healthy if the trade situation worsens. That thinking seems dominant recently, at least judging by the performance of the Russell 2000 Index (RUT), which tracks small-cap companies and has a heavy weighting toward regional bank stocks.

Until recently, the RUT was getting outmatched as large-cap indices like the S&P 500 (SPX) and Dow Jones Industrial Average ($DJI) scored new all-time highs even as the RUT languished well below last year’s peaks. By late November, the RUT was showing signs of strength, outpacing some of the other indices this week as trade worries burdened some of the big multinational stocks. The question entering December is whether small-caps can keep up this pace, and perhaps get a boost from any investors running for cover from bad trade news.

Another trade-related trend to consider watching in December is the progress of so-called “defensive” sectors like Utilities, Staples, and Real Estate. Earlier this year, they surged as Treasury yields came under pressure. Then the situation reversed and yields started climbing this fall, weighing on those same sectors. Could we be heading for another plot twist in this long-running story?

In late November, the 10-year Treasury yield fell from a three-month high near 1.96% down to below 1.75%. When yields fall, that sometimes makes defensive sectors (which are often referred to as “bond proxies”) look more attractive to certain investors seeking dividends in a low-yield environment. If Treasury yields keep dropping in December, it might be interesting to see if Staples, Utilities, and Real Estate start getting bids. A lot of it could hinge on the next moves in the trade war, because recent pressure on Treasury yields stems in part from worries a deal might not be inked in the near future.

Slow Walk By Fed?

Yields might also react if there’s any interesting news from the Dec. 10-11 Fed meeting, but odds don’t seem high of this one launching many fireworks. As of late November, the futures market pointed to a 94% chance of the Fed standing pat on the Fed funds rate, which now stands at between 1.5% and 1.75%. That’s down 75 basis points from last summer after three cuts in a row at the last three meetings.

Minutes released in late November from the Fed’s most recent meeting showed no one on the Federal Open Market Committee (FOMC) itching to lower rates any further at that point. That backs up what some analysts have been saying about the Fed maybe wanting to step back and watch for a while to see if the 75-basis point lowering starts to reverberate around the economy. As seasoned investors probably know, rate cuts can take time to have an impact.

On the other hand, there’s a school of thought that suggests no amount of rate cuts can have much effect on business spending until companies have a playbook on how to approach trade with China. The futures market suggests the odds are still about 50% that rates by mid-2020 will be right where they are now, and even a year out there’s a pretty good chance for rates at current levels.

The Fed’s updated “dot-plot” showing where FOMC officials expect rates to go in the next year or two will be released at the December meeting, and that might be interesting to check for any signs of views getting more hawkish. If that sounds odd, it might be worth noting that at least a handful of people think the Fed could hike rates in December—the futures market gives that about 5% odds.

Year-End Data Countdown

December isn’t typically a really big month for earnings or data, but there is a smattering of stuff to watch. The Dec. 2 ISM manufacturing report for November and the Dec. 6 non-farm payrolls report for the same month stand out in the first week of the month. Back in early October, a weak ISM report really weighed on the market, but the number from early November showed a slight bounce and might have helped ease some concerns about the health of U.S. manufacturers. That said, the headline number remained under 50%, at 48.3%, which indicates contraction. If it goes back above 50% for November, that might potentially boost market sentiment.

Also for sentiment, it would be good to see November’s non-farm payrolls data look a little more lively than October’s. Only 128,000 new jobs were created that month, though the three-month average is a hearty 176,000.

Key earnings reports in December are few and far between. It seems like most companies don’t want to interrupt peoples’ holiday season by reporting in the latter part of the month. Before that, however, investors are expecting earnings from semiconductor firm Micron Technology, Inc. MU; retailers Costco Wholesale Corporation COST, Nike Inc NKE, and Kroger Co KR; homebuilder Toll Brothers Inc TOL, and transport company FedEx Corporation FDX.

December is when many analysts start putting out observations on what the new year might bring, so consider watching for those as the month rolls along.

As an investor, December is also a good time to take stock (no pun intended) on where your portfolio has gone over the course of the year and if your asset allocation still makes sense based on any changes in your financial goals or big life events that might have happened since last January.

Before the ball drops in Times Square and those annoying party horns start to give you a headache, consider taking a couple of hours to check where you stand. People often spend more time planning their vacations than planning their finances, and you don’t want to be in that category.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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