After an impressive 4-week rally, US equities appear to be butting up against arguably their first formal area of technical resistance being near the 200-day moving average. The broad-based strength that began the day after Christmas is in recent days turning decidedly more sideways; for the week ending January 25 the Dow managed to finish slightly higher and extend its weekly winning streak to 5, but the S&P500 (considered to be broader and more representative of the overall market) slipped slightly.
Interestingly, the reason for more mixed market action can also be attributed to fundamentals such as economic data and corporate earnings. With the government still partially shut down and slowing the release of some data, the big watch item last week was the heavier flow of corporate earnings for the 4Q. This week roughly 180 of the companies in the S&P500 are set to report. Widely anticipated throughout this earnings season is that companies will be offering a more cautious tone given the excuse that market weakness as well as trade and political uncertainty easily provide in recent months. Too, most analysts expect the pace of earnings growth enjoyed during 2018 – the first year benefiting from corporate tax reform – will be moderating/slowing as we move into 2019 from both harder year-on-year comparisons and also the mature age of the economic cycle. Season-to-date, 71% of companies are beating expectations, but just 50% are doing so on revenues which are harder to engineer. On that score though, overall, revenue growth during the 4Q is up at a healthy 5.5% annual pace; that will be the line to watch most closely for signal about the health of the US economy. In the coming weeks however, investors remain on watch to see if the tone of earnings calls deteriorates as we move deeper into the reporting season when companies with weaker performance are more likely to be slow to report. More macro, the housing market is receiving attention for being slower than usual this time of year, and China economic data is the softest in more than a decade. All of this is to say that while the US economy appears to be anything but on the brink of recession, it makes sense that the financial markets might be due for some renewed volatility from a fundamental perspective.
As we noted in these pages a week ago, early-year strength for equities arrived despite a quite lengthy list of policy-related items that need to go “right” in 2019. On that score, a soft economic landing still appears possible as investors are being provided with a more encouraging tone from the Federal Reserve on its thoughts about interest rate policy, and trade talks between the US and China appear more collaborative and deal-seeking (a stark contrast to much of 2018 when they felt decidedly more combative). One less tangible item, but consistent with the present theme of global political discord was the month-long partial US government shutdown. Markets behaved well during that period, but there is evidence that consumer and business sentiment was being hurt as a result. Will the deal reached on Friday to re-open the government for 3-weeks lead to productive discussion necessary to remove that item from the list of present investor worries? If it does not and the government is again shut down 3 weeks from now, confidence could take another hit. Also on tap this week aside from the continuation of earnings season is another FOMC (Fed) meeting and press conference from Chairman Powell; will his words keep the markets calm, or will he instead reignite concerns as he did in December by coming across too positive on the trajectory of the economy and/or imply hawkish preference on monetary policy? Suffice to say, a busy week lies ahead as we wrap up January.