Weekly market update
Stocks continued their rally from late December and the Dow, S&P 500 and NASDAQ are up 2.9%, 3.6% and 5% respectively on the year. Things have been coming up roses for the stock market lately, so let’s take a look at why.
I look at the major “worries” and I see big progress, particularly on the two biggest problems for the market: The Fed and China trade.
- FED and rates: FED Chair, Jerome Powell, provided much greater clarity on FED policy, showing the FED is listening and would be flexible.
- China trade: Talks began again last week between the U.S. and China.
- China economy: China is in stimulus mode. The Chinese government last week dramatically loosened liquidity and pledged additional support for small businesses.
- U.S. inflation: It is tame, even with somewhat higher wages.
- Gas prices: They are 20% lower since October, which I’m surprised I don’t hear more about. It’s a huge tax cut for the American consumer.
- Recession risk in 2019: It is much lower, thanks to Powell’s comments on flexibility and the still-strong jobs report. Speaking of the jobs report—we added more than 300,000 jobs in December blowing the roof off estimates.
- Earnings: Much lower expectations already are built into the market. The only debate is whether you fall into the camp that sees zero growth in 2019 or the one that sees low-to-mid-single-digit growth.
- Europe growth/Brexit: It is still murky, with no resolution here. That makes it tricky for European Central Bank’s Mario Draghi. It’s tough to cut rates if the economy slows when they are already effectively at zero.
- U.S. political risk: It’s still real, and not limited to the government shutdown that could keep things closed for some time. With ex-Defense Secretary James Mattis and other key moderates gone, markets are clearly worried that it may not be Powell that makes the “policy error”—it may be President Donald Trump.
Add it up: In the last 2 week, six of the nine worries listed above have improved, with earnings now neutral. That leaves Europe growth/Brexit and U.S. political risk as the only two major worries that haven’t improved since New Year’s Day.
We are certainly not out of the woods, but the trend is definitely improving.
This week kicks off earnings season so we’ll be keeping a close eye on those. The banks will be the first group to report and it will be interesting to see how they hold up given the falling rates. We’ll also hear from a few tech names as well. There will also be a flood of economic reports due out this week and we’ll be monitoring those to see if the economic data is softening, so stay tuned and we’ll keep you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
January 15, 2019
