Equities posted the best January results in thirty years; the abrupt reversal of fortune, while perhaps bittersweet, signaled renewed confidence in the economy. For the week the S&P 500® Index rose 1.57%, followed by the Nasdaq (1.38%), Dow Jones Industrial Average (1.32%) and Russell 2000® Index (1.29%). On Wednesday, the Federal Reserve left interest rates unchanged and removed longstanding commentary that further rate increases may be necessary. The Fed also stated that its primary means of adjusting monetary policy will be changes to the Fed Funds rate; the revised guidance lessens the role of balance sheet adjustments. Many banks incorporated assumptions for no interest rate increases in their 2019 financial projections. Friday’s jobs report surprised the market with the addition of 304,000 jobs, analysts expected only 172,000. The unemployment rate edged up 0.1% to 4.0% as the government shutdown added to the ranks of the unemployed.
President Trump cited ‘substantial progress’ in trade negotiations and commented that he will soon meet with Chinese President Xi Jinping in an attempt to reach a comprehensive trade deal; absent new direction from the President, though his Administration still views March 1st as a ‘hard’ deadline on tariffs. The recovery of crude oil prices continues; OPEC nations achieved 75% of their targeted production cuts in January as they implement aggressive actions to rebalance inventories. Production levels in the U.S. are also benefitting from more fiscal discipline as drilling programs emphasize profitability. The U.S. announced additional sanctions on Venezuela this week which will likely lower the country’s production levels. Earnings results are generally favorable; more than 45% of companies in the S&P 500® have reported earnings; 68.1% exceeded analyst expectations. Some, but not all, companies report the impact of trade issues. For example, Caterpillar reported weakness in China while Graco reported strong demand and growth from all international markets. The recovery of Technology companies continued with positive earnings reports from Facebook and Symantec. Some company-specific developments, though, have reduced revenues and profitability for the quarter.
February has a reputation for choppy returns and the move off the December lows likely needs to be consolidated, but we’re more inclined to view the persistency of recent strength as a legitimate sign of momentum that has been largely absent for the better part of the last 12 months.
The dramatic change in sentiment is forcing investors who fled the equity markets in December to decide when to reenter. Small cap stocks, many of which outperformed in January, will report earnings in February. Investors are rewarding those companies with strong results; and yet, company executives may well temper expectations and outlooks pending clarity on trade negotiations, Brexit, oil prices and other geopolitical events. Many companies are poised for growth in 2019; these results, along with positive developments on trade and monetary policy, may provide continued market momentum.
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week's Headlines: 2/4/2019
1. The monthly Consumer Confidence Survey, based on a probaility-design random sample, is conducted for The Conference Board by Nielsen, a leading global provider of information and analytics around what consumers buy and watch. The cutoff date for the preliminary results was January 17. "Consum...
Federal Reserve holds interest rates, pivots to 'patient'...
The Fed signalled flexability on the path for reducing its balance sheet, a substantial pivot away from its bias just last month toward higher borrowing costs
Facebook shares shoot up after strong Q4 earnings despite...
Facebook managed to beat Wall Street's estimates in its Q4 earnings amidst a constant beat down in the press. Facebook hit 2.32 billion monthly users, up 2.2 percent from 2.27 bill la...
Employers add booming 304,000 jobs in January, marking 10
Employers added 304,000 jobs in January, the 100th straight month of gains. Economists expected 165,000. Governement shutdown was set to have modest impact
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