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Strong jobs report with decelerating manufacturing: The big question at this inflection point is whether we’ll have another acceleration of growth or whether recession risk remains elevated.

Lyn Alden

Last week was one of the more volatile weeks within the past couple months, as the S&P 500 and other stock indices saw large up and down days. The S&P 500, which the C Fund tracks, closed at another high level, but slightly below its all-time high from last week.

Chart Source: CNBC

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Stock prices slid early last week when President Trump said a trade deal with China might not happen until after the 2020 elections. White House sources, including Larry Kudlow, had been suggesting that a partial trade deal was close, so this announcement threw a curve ball into market expectations. However, stocks resumed their upward march later in the week on renewed trade optimism.

Apart from that, conflicting economic data made it unclear whether the U.S. economy is strengthening or weakening this quarter, which eventually has significant impact on stock performance. The U.S. economy and much of the rest of the world have been in a slowdown in 2019, meaning that the economic growth rate is decelerating but still positive. The big question at this inflection point is whether we’ll have another acceleration of growth or whether recession risk remains elevated.

Manufacturing: The ISM manufacturing purchasing manager’s index report for November came in worse-than-expected mid-week, with a 48.1 reading. This was below consensus estimates and below October’s number, and indicates continued mild contraction in the manufacturing sector. Their non-manufacturing report was also disappointing, but still positive.

Jobs: On the other hand, initial jobless claims over the past two weeks have been relatively low, and the jobs report on Friday was well above expectations with 266,000 net jobs created. Even after factoring out one-time things like the end the worker strike at General Motors, it was still a stronger-than-expected report.

Official quarterly GDP figures are not provided until after the fiscal quarter ends, and then are subject to revisions. A final number is not known for quite some time in hindsight. However, there are numerous methods to estimate current GDP growth, and these methods are giving conflicting results due to conflicting data.

For example, the Atlanta Fed’s data-driven GDPNow estimate, which seeks to provide real-time estimates of the current Q4 GDP, currently suggests that the annualized GDP growth rate may be a moderate 2.0%. This is up significantly from their estimate of less than 0.5% growth back in early/mid November:

Chart Source: Atlanta Fed GDPNow

On the other hand, the NY Fed’s data-driven Nowcast stands at 0.6% growth for Q4 2019 and 0.7% growth for Q1 2020, which remains very low:

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Chart Source: NY Fed Nowcast

The New York Fed summed this up by saying “negative surprises from the ISM manufacturing survey were only partially offset by positive surprises from employment data”, meaning they are weighting the manufacturing survey more heavily.

The Blue Chip consensus estimate is for 1.5% growth, with a range from 1.0% to 2.0%, indicating modest but positive growth. The NY Fed’s model is more bearish, while the Atlanta Fed’s model sits at the top end of the range currently, after having been below it last month.

A note on asset allocation

Investors should be careful not to chase recent performance based on quick emotional decisions. Asset allocation should usually be based on your long-term goals and your risk tolerance. Decisions to increase or decrease your allocation to equities, for example, should be well thought-out and applied for good reasons. For many investors, the Lifecycle funds can be ideal investment vehicles because they are consistently diversified and rebalance themselves over time.

More on the Lifecycle funds here: The Pros and Cons of Lifecycle Funds

Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.