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Market in a Minute: January 28 – February 1, 2019

Sunday, February 3, 2019

by Rich and Sheila Jamison

Executive Summary

Equities resumed their 2019 rally with the S&P 500 having its best January since 1987. The rally was spurred by a dovish turn by the US Federal Reserve, another month of surprisingly strong jobs gains and better-than-feared earnings. The energy (+3.2%), consumer staples (+2.9%), real estate (+2.9%) and industrial (+2.6%) sectors led the advance. Consumer discretionary (the only sector that lost ground, -0.1%), financials (+0.1%), and materials (+0.8%) underperformed.

The Fed’s shift in tone (seen as a foe to friend pivot) dropped the US 10-year Treasury yield to 2.69% and weakened the US dollar by 0.2% - which supported commodity prices (WTI crude oil up 3.0%). Volatility (by the CBOE’s Volatility Index, the VIX) declined to 16.1 from 17.4 a week ago.

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Details

Domestically

It was more than the Federal Reserve leaving the fed funds target rate unchanged. Interest rates fell and risky assets rallied in the wake of very dovish commentary from the Fed after their January meeting. It seemed to go out of its way to reverse course after sending a more hawkish-than-intended signal to markets after their last meeting in mid-December. December’s remarks were followed by a slide in stocks and a spike in credit spreads. The Fed indicated that its next move could be either a hike or a cut, a shift from signaling further hikes in each of its policy statements for the past several years. Fed chairperson Jerome Powell said that the case for additional interest rate hikes had weakened in recent weeks while downplaying the likelihood of a significant uptick in inflation. The central bank further indicated that it is likely to maintain a larger balance sheet than it had planned, with the runoff of assets projected to end early this fall at a terminal size of around $3.5 trillion, a much higher level than markets expected when the runoff began.

Nonfarm payrolls surged in January. We added 304,000 jobs compared with expectations for 170,000. Average hourly earnings rose 3.2% year over year. On the other side, December's extraordinary jump was revised down by 90,000 jobs while November's total was revised up by 20,000. January’s rise in payrolls was the 100th straight month of gains. Meanwhile, unemployment ticked up to 4%, partially because of the government shutdown, according to the Labor Department.

With almost half of the S&P 500 Index companies having reported for Q4 2018, blended earnings per share* shows earnings growth running at 12.4% year-over-year. Revenues are seen rising 6.4% compared with the same quarter a year ago. Last week’s results were mixed but generally not as bad as many had feared. Reports from 3M, Apple, Boeing, Chevron, Exxon Mobil, Facebook, General Electric, Merck and Pfizer pleased investors. Those by Amazon, Caterpillar, DowDuPont, Microsoft, McDonald's, Verizon and Visa underwhelmed.  

*combines actual data reported with estimates for those who have yet to report.

Our trade negotiators met with China’s in Washington last week, but no breakthroughs were achieved. However, the stage was set for a meeting between Xi Jinping and Trump in late February, at which Trump indicated the leaders might be able to forge a comprehensive agreement. Trump also suggested that the talks might need to be extended past March 1, the deadline he imposed at the outset of the negotiations.

Globally

German economy minister Peter Altmaier has called for €10 billion in new measures to stimulate Germany's economy. The package includes incentives for corporate investment and tax deductions for investments in energy efficiency for households and businesses. Chancellor Angela Merkel is discussing a sweeping cut in corporate taxes, taking the rate down from above 30% today to 25%, in order to counter the recent economic slowdown. Germany is positioned well to carry out fiscal stimulus given its budget and current account surpluses.

The British Parliament gave Prime Minister Theresa May a mandate to seek modifications to the UK/EU withdrawal agreement. The most contentious issue remains the so-called "Irish backstop" (potentially locks the UK into a customs union with the EU until a system is put in place to allow customs checks along the Ireland and Northern Ireland border). EU officials immediately said the EU would not renegotiate the withdrawal agreement. In the near term, it is increasingly expected the UK will ask for an extension from the EU. This will likely be granted, as neither side wants a no-deal Brexit.


Sources:
The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Reuters.com; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; Investing.com; Markit.com; the New York Times; Standardandpoors.com; Djindexes.com; 247wallstreet.com; MarketWatch.com; Morningstar.com; Thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; Dol.gov; Fxstreet.com; Streetinsider.com; Ycharts.com;
 
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

 

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