Following the worst performance for the S&P500 since 1931, the tone so far in these early weeks of 2019 is more hopeful. This is evidenced by broad and strong consecutive-day winning streaks; the S&P for instance was up +2.6% last week and +3.6% month-to-date. Even stronger are some areas of the market traditionally considered risk-seeking; the small-cap Russell 2000 climbed +4.8% last week and +7.4% in January. Key commodities viewed as a bellwether to economic growth including oil are also seeing their price recover notably off stressed December lows and international equities are participating in-line with the S&P. The cause? From a fundamental perspective, very little. But Fedspeak turned decidedly more dovish from the worrisome pre-disposed and not-so-data-dependent (toward additional hikes) tone that Chairman Powell conveyed with the rate decision in December.
For economic data, it continues to tell us what was widely known throughout all of 2018: US economic growth remains firmly in expansion territory (not recession), albeit likely to tame from the robust pace enjoyed throughout last year on the windfall of corporate tax reform. Simply put: year-over-year comparisons are much harder when the bar was set so high. But the employment report for December was unabashedly strong and impossible to overlay a negative narrative against. Significantly more jobs than expected were added and the participation rate increased; wage growth was healthy but far from being problematic.
As we continue to move past 2018 it would seem the perfect-storm of technical, market-liquidity, tax-loss selling, and a broad reluctance to take risk is fading. Too, government-made worries (trade and interest rate policy) seem to be at least thawing and less stubborn (excluding the relatively trivial-from-an-economic-perspective fight over a border wall). On the trade front, the US and China are again engaged in discussion; and members of the Federal Reserve seem more uniform in conveying an awareness and renewed data-dependent focus in recent public appearances. The markets have quickly went from expecting 2 or more additional rate hikes in 2019 to none or just one. In short, the markets went from pricing in hard economic slowdown/recession in 4Q 2018 to now viewing a softer landing as again possible.
As we move into the 2nd half of January, investors will be forced to shift their focus to corporate earnings season. While the Government shutdown is delaying the release of some economic-stats, corporate guidance is especially in center view. Markets shook earlier this month on reports that Apple experienced softer sales than anticipated and cited international trade uncertainty; some are suggesting that other companies may use 4Q volatility and Apple as cover to convey a similar and more sober outlook to investors. The question is: how much of this “bad” news expectation is already priced in? Some beaten down companies that cut forecasts have actually seen their stocks rise because of more attractive valuations and actual news being less-bad than what investors were bracing for. We believe the stage is set for a return to sunnier days in 2019, but following a strong 2-week period for US equities back to areas of technical resistance, that strength may be tested in the near-term.