Weekly Market Commentary February 04, 2019

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Markets returned to rally mode last week and finished January significantly higher. The S&P 500 surged 1.6% on strong employment data, the Federal Reserve communicating its concerns about slowing growth, and generally positive earnings data.

The relatively strong earnings pushed Carson’s expectations for earnings growth from 11% to just less than 13%. Strong earnings performance from major oil companies helped boost estimates, too.

Trade negotiations between the U.S. and China continued to move forward, although no major breakthrough was reported at the meetings in Washington.

Global stocks participated in the rally. The MSCI ACWI soared 1.5%. Bonds finished higher as the Bloomberg BarCap Aggregate Bond Index rose 0.5%.

Overall, January’s performance was quite strong. The S&P 500 rose 8%. The MSCI ACWI climbed 7.9%, and the Aggregate Bond Index gained an impressive 1.1% as rates declined during the month. Bond prices typically move in the opposite direction of interest rates.

Key Points for the Week

  • The U.S. jobs report provided evidence of ongoing U.S. economic strength.
  • The Fed reinforced its expectation that future growth will slow and is nearing the end of its tightening cycle.
  • Earnings were generally positive, and markets rallied on the news.

Market Analysis

Last week’s Federal Reserve meeting was a stark contrast to December’s. At last week’s post-meeting press conference, Fed Chair Jerome Powell said the Fed would be hesitant to raise rates given signs of economic weakness and uncertainty. Stocks rose sharply on the news.

At the December meeting, economic data was showing early signs of weakening and concern was spreading about a recession on the horizon. But at the Fed’s press conference, following a unanimous decision to raise rates, Powell showed limited concern for the market’s outlook. U.S. stocks dropped sharply and finally bottomed on Christmas Eve.

While signs of slowing in the U.S. economy remain, economic data last week supported the market, too. As the accompanying chart shows, the U.S. jobs report was exceptionally strong in January, although revisions to previous months showed they were slower than initially reported. Nonfarm payrolls surged 304,000, far surpassing estimates of 170,000 new jobs. Revisions to the November and December data reduced the large gains in those two months by 70,000. Monthly wage gains were only 0.1%, but they have still risen 3.2% over the last year. A strong jobs report should support consumer spending and reduce the risk of a recession in coming months.

The Fed’s transition to being dovish on rates may reduce the sharp market reactions to stronger economic data. Strong economic reports may cause investors to focus on improved earnings rather than be concerned too much good news will push rates higher.


Fun Story

Beach closed during shutdown can’t reopen because elephant seals took it over

A beach in Northern California is now overrun by elephant seals due to the government shutdown. The seals took over when federal workers were not monitoring the beach. The park has decided to keep the beach temporarily closed so as not to disturb the elephant seals. There are now around 50 seals on the beach and 35 baby seals (winter is when elephant seals birth and nurse their young).


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