Weekly market update
Let the record show that I am getting just as tired about typing subject lines related to Chinese trade talks as you are reading about them, but that’s the story once again last week as trade officials from both China and the U.S. have agreed to resume trade talks in DC this week. We ended the week on a modestly positive tone as we closed out the week and headed into the long holiday weekend. Not before the Dow climbed 3.2%, the NASDAQ rose 2.4%, the S&P 500 rose 2.5% and the small caps stocks as measured by the Russell 2000 led the charge—up 4.2% on the week.
First, stocks leaped higher on reports that a tentative deal has been reached to avoid another government shutdown, and then reports on positive talks with China on trade just kept it going.
As of this writing, all major U.S. indices have now climbed into overbought territory after the rip-roaring rally off the December 24th lows. Overbought refers to security or index that has been subject to persistent upward pressure and that technical analysis suggests is due for a correction. Buying pressure can feed on itself and lead to continued bullishness beyond what many traders consider reasonable. When this is the case, traders refer to the asset as overbought and many will bet on a reversal in price.
It wasn’t just here at home where stocks were rallying—global stocks greeted the sign of a trade truce with glee. European stocks had their best week since last year.
There was no earth-shattering earnings news last week as earnings season is drawing to a close. We do get Home Depot and Lowes next week and I’ll be watching those.
On the economic front, we got a mixed bag of reports.
The January read on small business optimism waned a bit—still reasonably good, but the lowest level since November 2016; yet, U.S. job openings rose to record 7.34 million. So, small business optimism may be waning because they can’t find workers.
Inflation, as measured by the Consumer Price index (CPI) came in as expected and really showing no significant signs of heating up. Thanks to a sharp decline in gasoline prices late December and early January which helped hold inflation at bay. Gas prices have started ticking up in recent weeks; however, we will see that impact on next month’s read on CPI. But, the big picture on inflation—waning inflation has persuaded the Federal Reserve to stop raising interest rates for the time being amid fresh worries about the economy’s future.
Industrial production fell into contraction territory following many of the EU countries last week.
And then there were retail sales. Retail sales fell off a cliff in December, down 1.2%—the worst plunge in nine years. Department stores sales were down 3.3% (not unusual) and internet retail sales were down 3.9% (shocking, actually). This was the first read on retail sales in two months thanks to the government shutdown.
Economically speaking, the U.S. is still growing, but we face more headwinds from a global slowdown, trade tensions with China and turmoil in Washington which makes it harder for businesses and investors to plan. As far as investors go, they are their most cautious/fearful now than at any point since the depths of the Great Financial Crisis. Cash holdings are at their highest since January 2009, according to the latest Bank of America/Merrill Lynch mutual fund manager survey.
This week is a holiday-shortened week with President’s Day. What will be the catalysts for investors to keep piling into stocks? It won’t be from earnings news, I am pretty sure of that. It won’t come from economic data—we only get the latest minutes from the January FED meeting and we know what they did and said. If I was a betting man, I would expect trade headlines to be the market driver up or maybe down, so stay tuned and we’ll keep you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
February 20, 2019
