A tale of two sectors: U.S. manufacturing weakness vs. services strength

On the latest edition of Market Week in Review, Senior Portfolio Manager Megan Roach and Research Analyst Brian Yadao discussed the latest in China-U.S. trade negotiations, the U.S. employment report for November and recently released data from the manufacturing and services sectors.

China-U.S. trade talks continue ahead of important mid-month deadline

The week of Dec. 2 began on a sour note for markets, punctuated by U.S. President Donald Trump’s comments that he may wait until after the November 2020 elections to secure a trade deal with China. Additional remarks by the president on reinstating tariffs on aluminum and steel imports from Brazil and Argentina, as well as potentially imposing tariffs on French imports, were also received negatively by markets at the start of the week, Roach said.

However, markets rose during the second half of the week after news broke that the U.S. and China remain motivated to secure a phase one trade deal ahead of a key mid-December deadline, she added. “Absent a deal, on Dec. 15 the U.S. may impose tariffs on approximately $156 billion in Chinese goods, most of which are consumer-oriented,” Roach explained. The timing could prove detrimental to U.S. consumers, she noted, as the new tariffs would go into effect during the middle of the busy holiday shopping season.

U.S. charts stellar November employment gains, adding 266,000 jobs

Overall, recently released economic data has trended more positive than negative, Roach said—especially as it pertains to the U.S. employment report for November. The nation’s economy added 266,000 jobs last month, she said, blowing past consensus expectations of 180,000 non-farm payroll additions.

“This is, hands-down, a phenomenal jobs report,” Roach stated, adding that the rolling three-month average for job additions now stands at over 200,000. “This is a very strong number—essentially double what the U.S. would need to keep the unemployment rate steady,” she explained. In addition to the glowing employment report, U.S. motor vehicles sales and consumer sentiment during November also came in strong, Roach said.

On the manufacturing side, the Institute for Supply Management (ISM)’s manufacturing index fell slightly in November, down to 48.1—remaining in contractionary territory for the fourth consecutive month. In the eurozone and the UK, PMI (purchasing managers’ index) readings also remained at contractionary levels, Roach added.

The story was brighter on the services side, however, with the ISM non-manufacturing index coming in at a reading of 53.9. Any reading above 50 indicates expansion, Roach said. “Even though the services number was slightly below consensus expectations, it’s still a healthy number indicative of growth,” she explained.

3 key takeaways for investors

Roach concluded the segment by offering three key takeaways for investors to keep in mind in the weeks ahead. The first, she said, is that she and the team of Russell Investments strategists believe that the U.S. and China have ample motivation to reach a phase one trade deal ahead of the Dec. 15 deadline.

Roach’s second takeaway is that this year’s trend of a strong U.S. consumer and a stronger services sector (relative to the manufacturing sector) looks to continue into 2020. Third, despite headwinds from trade, equity markets have performed very well in 2019, as evidenced by the approximately 20% year-to-date gain in the S&P 500® Index (as of Dec. 6, 2019), she said.

“It’s important to realize that most of these gains have come from multiple expansion—and not from corporate earnings growth,” Roach remarked. Continued strength in the U.S. consumer will be vital to improved earnings growth in 2020, as well as to supporting the multiples that are in the market today, she concluded.

Watch the video. Listen to the podcast. And subscribe.