Weekly market update
Talk about a turnaround from what we saw for the major averages in December. January 2019 saw the S&P 500 climb 7.9% for its best January since 1987, while the Dow rose 7.2%, its best January since 1989. The NASDAQ had its best January since 2001 with a 9.7% monthly gain and the Russell 2000 tacked on 11.25%.
The markets are pricing in an awful lot of good news, not just a dovish FED but a positive outcome on trade talks and the continuation of downward trending. Overall, still positive earnings.
On the earnings front, we are now over halfway through earnings season and earnings growth is running about 12% YoY. That is down from the pace we saw during the past 3 quarters, but we’ll take 12%. All eyes were on the industrial bellwether Caterpillar’s (CAT) Q4 earnings for confirmation whether the China slowdown is indeed trickling down into China-facing U.S. companies. After China reported that total industrial profits posted a second consecutive YoY decline in December, sliding -1.9% vs -1.8% in November), and that’s precisely what CAT reported when it announced Q4 EPS of $2.55. A huge miss to expectations of $2.99, on revenue of $14.3BN, also slightly below the $14.36BN expected.
While the numbers were not a disaster on a comparable basis, with sales up 11% from a year earlier, while adjusted EPS also rising 18% from Q4 2017, the EPS miss was the biggest since 2009 as Wall Street failed to adjust its expectations lower for what is clearly a China slowdown story.
Nvidia (NVDA) also told us the same thing we heard from Intel (INTC) and Apple (AAPL)—consumers are slowing down and large deals are not closing because of economic/trade uncertainty. If they’re all “a one-off” then none of them are one-offs.
Stocks got a big boost following the latest FED 2-day meeting and press conference. Here is what the markets wanted to hear:
The market wanted to hear that the economy is very strong, but we are going to pause rate hikes for the rest of the year and we are going to slow-down the balance sheet reduction, and that’s exactly what we got. The FED removed the reference to further gradual rate increases—they hit the pause button, not just on rate hikes, but a potential pause in the balance sheet normalization. We’ll call it the “Powell Towel” as FED Chair Jerome Powell basically threw in the towel and gave in to what the markets wanted. The market’s reaction to FED’s dovish turn furthers the view that the stock market crash of 2018 was worsened by the largest monetary policy error ever.
And now, the FED’s credibility would be questioned if they subsequently turn hawkish (so soon). No sooner did the FED hit the pause button because, for whatever reason, we learn that the U.S. created another 305,000 jobs in January, manufacturing activity picked up and consumer sentiment rose. So, could that mean the FED flip-flopped from hawkish to dovish too soon? We’ll see.
As we head into February, we’ll be looking for a catalyst to keep the major averages pushing higher. It probably won’t be earnings, as earnings season is starting to slow to a trickle, but still some big names to report. We know the FED is a pause, so we’ve got that out of the way. Trade talks with China last week didn’t produce a deal, but the good news is they are still talking and the U.S. will be sending a delegation to Beijing in a couple of weeks, so we will still be monitoring this trade discussion in hopes for anything that resembles a deal. We’ll also be watching the events inside the beltway in DC. If our elected officials can’t come together on an agreement on border security, I don’t think that President Trump would hesitate to shut the government down again by February 15.
So, stay tuned and we’ll keep you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
February 4, 2019
