U.S. financial markets began 2020 with the continued momentum seen late in 2019 on the easing of trade tensions, steady economic growth, and an accommodative monetary policy. The Dow Jones Industrial Average closed above 29,000 and the S&P 500 closed above 3300 for the first time in history. The markets were able to shrug off concerns about rising geopolitical tensions with Iran and the impeachment trial in the Senate until fears about the coronavirus started to escalate.

U.S. equity markets declined by roughly 3 percent in the last six days of January as the World Health Organization declared the coronavirus a global health emergency. Adding to those concerns is the lack of transparency about the origins of the virus and the general distrust of government institutions.

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The ISM Manufacturing Composite Index is a subcomponent in the Economic Cycle indicator in TJT’s proprietary InVEST Risk Model®.

The ISM Manufacturing Composite Index increased to 50.9 in January from 47.8 in December.  It was the first expansionary reading above 50 since July 2019 for US manufacturing that has been contracting for five straight months.

Readings above 50 in the ISM manufacturing index signal month- to-month growth for U.S. manufacturing as a whole, while those below 50 indicate monthly contraction. For the economy as a whole, historically readings above 60 signal national GDP growth of 5 percent, while those below 43 signal GDP contraction.

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The 2019 year began with the ongoing partial government shutdown, the Robert Mueller investigation into election interference, the continuation of the trade war with China, and a Federal Reserve that rattled markets by raising interest rates four times and stated the reduction of their balance sheet was on “automatic pilot.”

As the 2019 year came to a close, the Mueller Report turned out to be a non-event, a “Phase 1” trade agreement with China was announced, the Federal Reserve cut interest rates three times and began to increase the size of their balance sheet again, and the S&P 500 index rallied by more than 28 percent.

The political drama in Washington continued, however, with the House of Representatives voting to impeach President Trump primarily along party lines, yet the articles of impeachment have not been sent to the Senate at this time. The 2020 New Year began with rising geopolitical tensions as a result of a deadly drone strike on an Iranian general.

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The 4-Week Moving Average of Initial Claims is a subcomponent in the Economic cycle indicator in TJT’s proprietary InVEST Risk Model®.

New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smooths out weekly volatility.

Initial jobless claims for the week ending 12/7 jumped to 252,000, up 49,000 from the prior week’s 203,000. This moved the 4-week moving average up to 224,000.

Historically, weakness in the economy tends to show up in weekly initial jobless claims prior to the overall unemployment rate increasing. The large week over week increase bears watching to see if a trend develops or if it was an outlier.

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The U.S. equity markets recorded all-time highs in November as momentum from trade deal optimism along with a liquidity injection from the Federal Reserve boosted risk assets. In addition, some money that had moved out of equities on concerns about an economic recession and the impeachment inquiry came back in, and some hedge funds that had bet against the market were forced to cover their short positions.

On October 11, 2019 President Trump announced a partial trade deal with China saying ”we have come to a very substantial phase one deal.” On October 13, 2019, President Trump tweeted “My deal with China is that they will IMMEDIATELY start buying very large quantities of our Agricultural Product, not wait until the deal is signed over the next 3 or 4 weeks.”

The “deal” announced in October was supposed to have been signed in November. Yet on December 3, 2019, President Trump said at a NATO summit “in some ways, I think it’s better to wait until after the election” to do a deal with China.

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On October 11, 2019, in response to overnight lending rates surging due to extremely tight liquidity, the Federal Reserve announced it will be purchasing 60 billion dollars of Treasury bills per month at least into the second quarter of next year in order to maintain ample reserve balances.  This was the first time since 2014 the Fed’s balance sheet is intentionally growing.  While the Fed points out that this “Balance Sheet Normalization” is required to address the need for additional reserves in the system and not technically “QE” (quantitative easing), it nonetheless is adding additional liquidity to the system.

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The S&P 500 index gained 2 percent in October and recorded an all-time high as the Federal Reserve cut interest rates and progress was reportedly made on the ongoing trade war with China. After exceeding the 3000 level in July and again in September – only to be followed by sharp declines – the S&P 500 broke through for the third time and took out the July high of 3025.86 to close at 3037.56 on October 31, 2019.

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The Unemployment Rate is a subcomponent in the Economic cycle indicator in TJT’s proprietary InVEST Risk Model®.

U.S. unemployment hit a 50-year low in September.  The jobless rate dropped to 3.5% in September from 3.7% in August, marking the lowest rate since December 1969.

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The S&P 500 index gained 1.7 percent in September despite headwinds from slowing global growth, the ongoing trade war with China, rising geopolitical tensions in the Middle East, and the new impeachment inquiry into President Trump. The S&P 500 closed out September at 2976.74, compared to 2980.38 at the end of July and 2913.98 on September 30, 2018.

Since the Federal Reserve initially cut interest rates on July 31, 2019, the S&P 500 was roughly flat at the end of September, and had gained 2.3 percent over the previous twelve months. Clearly the trade tensions have had a lot to do with that, and it has been an exhausting exercise. One day President Trump bashes China at the United Nations General Assembly, and literally the next day he says a deal with China “could happen sooner than you think.”

President Trump’s supporters suggest his version of “3-D chess”- a complicated negotiating game that works to his advantage – is helping, while his detractors say it is an indication of an ad hoc policy that changes depending on what the markets are doing at that time.

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