US financial markets continued their rebound during the President’s Day shortened trading week ended Friday the 22nd. The S&P500 added another +0.7% and international markets also responded with the MSCI EAFE improving by +1.6% (now up +9% YTD). Whereas January was fueled by a softer, more comforting tone by the US Federal Reserve and other foreign central banks, progress in February is being supported by increasing optimism over a trade/tariff resolution being finalized between the US and China. On that front, talks continue to carry a deal-seeking tone; a stark contrast from the war of words and relentless lobbing of verbal grenades that characterized 2018.
From an economic perspective, data appears to be stabilizing and domestic corporate earnings results are generally arriving better than feared given the rapid deterioration of sentiment and financial conditions during the 4Q. Guidance for 1Q earnings is admittedly more sober however than the results enjoyed throughout each quarterly period of 2018, and that more moderate pace of corporate profitability should translate to higher volatility than we’ve seen during the first 2 months of 2019 and a more mixed path for financial market performance from here. Last week we received an update that housing is improving modestly with interest rates appearing on pause (homebuilder stocks been on a tear); durable goods orders also improved. At the same time, retail sales and industrial production slipped in their most recent readings; PMIs in both the US and Euro Zone also eased for February. And despite international equities appearing to be a relative bargain on the basis of valuation, economic data is generally weak if not in outright contraction in several key European economies.
With the economic cycle clearly in the mature phase, and long by historical standards, the robust YTD rebound by US and foreign financial markets should probably not be interpreted as an “all clear” signal. Markets have a way of climbing walls of worry and there remains upside, but cracks are being exposed by the underlying fundamentals, especially abroad. We believe an economic soft-landing (downshift of economic growth without recession) remains possible in the US, but one item that needs to begin to show meaningful improvement is foreign. On that score, progress is also occurring with China moving to implement significant stimulus. The ECB and Japan are also signaling new rounds of easing are being readied. An agreement/conclusion between China and the US on trade would also reduce if not eliminate a significant source of uncertainty for global businesses as we move deeper into 2019. Still, it is important that investors continue to employ a disciplined, diversified, and emphasis on quality to protect against potential risks at this stage in the cycle.