The first week of 2019 was a roller coaster for investors, fueled by a data tug-of-war. Mid-week, China announced a reduction in its 2019 growth forecast. That led to a harrowing decline for those U.S. stocks with significant revenue exposure to China. This was then followed, on Thursday, by two conflicting reports for December, with the ADP employment survey showing much stronger than forecast employment and wage trends, and the ISM manufacturing data indicating a marked slowdown from the November report. That last stalemate was broken on Friday morning with what Comerica’s Chief Economist, Dr. Dye, characterized as a ‘whale of a jobs report’ from the Bureau of Labor Statistics that was considerably stronger than forecast. That seemed to resolve any questions regarding the strength of the economy, and by Friday’s closing bell, it was smiles all around. Leading the way last week, on news of a massive production cut by Saudi Arabia, was energy, adding 4.46% for the week. In second place were the communication stocks, up 3.84% on strength in the entertainment group. Consumer discretion rounded out the top three adding 2.18%, thanks to strong gain among an eclectic blend of travel and lodging stocks. The leadership had a distinctly small company bias, as the S&P 600 Index delivered a 3.23% gain compared to the S&P 500® Index advance of 1.74%. Internationally, the developed markets added 0.98%, while emerging markets slipped 0.66% on higher energy prices and a stronger U.S. dollar. In commodities, energy led the way with crude oil gaining 7% on the Saudi production cut, and agricultural prices picked up two to three percent on slightly lower than forecast inventory data. In metals, it was a good week for precious metals, as silver gained 1.5%, but industrial metals were generally lower as commodity investors assessed the Chinese announcement.
On that announcement by the Chinese, we need to remember that many times what is said is not intended for international consumption, but domestic. The “official” Chinese growth rates being a case in point. There is a wealth of data available for testing those releases. One of my favorites is the data series on kilowatt hour (kWh) production, which for most countries tracks very closely with the rate of change in GDP or even national income accounts. But for China, it is a very different story, and for the largest producer of electricity on the planet, that is very telling. By way of comparison, China is producing 5.88 trillion kWh compared to 4.1 for the U.S. India comes in at number three with 1.4. During its days of wine and roses, China was growing kWh at twelve to fourteen percent a year. Even in the “recession” years of 2010, 2011 and 2014, they managed growth of six percent. But the rebound in 2015 was only to a nine percent growth rate, and in 2016, it slowed to just over four percent. So, when you see talk of six and seven percent growth rates, it would be wise to take that with a grain of salt. China is evolving beyond the export-driven model, and as it was in the U.S., that change will come with challenges and a certain degree of domestic tension. We may be the scapegoat the leadership in China needs as cover for the tough changes they plan to make.
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