Weekly market update
The rally in stocks continues to roll. The Dow Jones Industrial Average rose another 3% last week, the S&P 500 rose 2.9% and the tech-heavy NASDAQ rose 2.6%. For the year, the Dow is up 6%, the S&P is up 6.6% and the NASDAQ is up—get this—9%.
I mean, we still have to worry about the FED, although they have been jawboning and trying to tell investors what they want to hear—flexibility on rates and balance sheet. We still have trade skirmishes with China. And the concerns about recession still remain—here and abroad. Our government is still closed and the Brits can’t come to an agreement on Brexit. So, all the concerns are still there.
But announcements last week of possible concessions in the U.S-China trade discussions raised all boats last week across the globe.
However, the markets now have a new fear: FOMO.
In the past few days, as we have reached the heart of earnings season, the markets have again resumed their upward drift. In discussions with traders, there is a new fear on the Street. It is not fear of the government shutdown. It is not fear of a continuation of the tariff war. It is not fear of a China slowdown getting worse.
None of those concerns have disappeared. But there has been a new one added to the top of the list: Fear of missing out—FOMO—on the rally.
S&P on pace for best month since March 2016. The NASDAQ, since October 2015. So, is this the recipe for pushing the major averages higher?
- The FED turns dovish on balance sheet runoff and rates. Check.
- The U.S.-China trade deal. They’re working on it.
- Reopen U.S. govt. It’s a work in progress.
- Inflation—well it’s not happening.
So, as we look back, what explains the erratic breakdown and then swift reversal?
It was a “FEDfake” (a head-fake caused by the FED’s flip-flopping). Last quarter, they said that rate hikes and the balance sheet were on autopilot—rates were going up and the balance sheet was going to be reduced—no matter what. And that completely spooked the markets. And then they come back out recently and say they are going to be “flexible” and that is just what the markets wanted to hear. Thus, we have a face-ripping rally on our hands.
As of last week, Year-to-date U.S. equity ETF outflows were $7 billion! Stock investor sentiment is nowhere near as positive as the YTD returns would indicate. Investors are still crouched in something of a fetal position after December’s rout. Not here!
However nice the start of the year has been, we all remember last year’s selloff(s)—and we will be “cautiously optimistic” on many of the worries on Wall Street.
It is a holiday-shortened week as the markets are closed for Martin Luther King Holiday, but we’ll be back in the trenches on Tuesday and look to see if this rally can persist or if stocks pause and digest some of this year’s gains. So, stay tuned and we’ll keep you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
January 21, 2019
