Weekly market update
In a week of U.S.-China trade talks, signs of a slowing global economy and weaker than expected U.S. jobs report, the Dow fell 2.17%, the S&P 500 was down 2.1%, the NASDAQ fell 2.43% and the Russell 200 was off by 4.2%, their worst week of 2019.
Over the last two months, the major indices rallied strongly from their December 24, 2018 bottoms. However, most reached their November 2018 highs and have since turned lower, running into strong resistance.
No one should be surprised by the weakness/sell off. It was long overdue. As is often seen in investing, we believe the pendulum swung too far in the negative direction for equities late last year, but now may have swung a bit too far in the positive direction.
It wasn’t the trade deal—money was flowing out of stocks and into cash and bonds as global growth fears stormed the stage and took front and center. One day after the EU slashed their growth forecast, China reported that imports from the U.S. fell YoY by the most on record. They also announced several measures to stimulate growth in the short term, with little focus on trade policies. Most notably, officials lifted government spending quotas, lowered tax rates for manufacturers and others and state policies would remain accommodative for the rest of the year.
Back here at home, U.S. economic data has deteriorated and the threat of recession, while still relatively low, has risen. The FED is reading from that playbook, hence it’s more dovish tilt since it last hiked rates in December.
Slowing economic and sales growth aren’t the only things we are watching—rising wages around the world could pressure earnings and profit margins.
And the jobs report—the U.S. economy added just 20,000 jobs in February, a big disappointment but not a huge sign of worry after blockbuster February. The Unemployment rate fell slightly to 3.8%. Somewhat concerning is the sharp decline in the U6, which includes workers who are part-time purely for economic reasons—it fell almost 1%, which is weird, the sharpest on record. U3 is the official unemployment rate, while U5 includes discouraged workers and all other marginally attached workers.
And the beige book figures were released last week and they are signaling slower growth. The use of the term “strong” has fallen considerably and the use of the term “weak” has risen significantly.
Maybe the global economy is actually slowing down and central banks are right to stop “normalizing,” “tightening” or doing anything at all for the moment, or even longer. The deflation fight continues!
Right now, investors are looking for some catalysts to push stocks higher. We have been in a sideways pattern for two weeks now. Semiconductors, the Russell 2000, banks and industrial stocks have been weaker in the last couple weeks and with good reason. The markets are no longer cheap. The key to getting markets moving again is to stop the decline in earnings estimates. There are signs that are happening. There is a good chance for the much-feared “earnings recession” will not begin in the first quarter. We will see…stay tuned and we’ll keep you posted…
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
March 11, 2019
