Weekly Market Update (February 04, 2019 – February 08, 2019)

By Craig Fehr February 08, 2019

U.S. stocks finished flat, digesting January's gains, while international stocks underperformed on worries of a European slowdown. The European Commission cut its forecasts for Eurozone economic growth to 1.3% from 1.9% in 2019 amid trade tensions and domestic challenges. While not surprising, the downgraded outlook confirms the soft patch in the region's economy. News that President Trump will not be meeting with China’s President Xi before the March 1 deadline, when another round of tariff increases is scheduled, unnerved markets, but the negotiations are still ongoing, and both sides seem willing to reach a trade deal. As a result of the revived global growth concerns, the U.S. dollar rose and crude oil fell. On the corporate front, with two-thirds of the S&P 500 companies having already reported earnings, approximately 72% of them have beaten earnings per share expectations, which is better than feared and in line with the historical averages. We continue to expect elevated volatility stemming from trade negotiations and global concerns, but we believe lower valuations and slowing but still-solid economic fundamentals can support rising stock prices.

A Fast Start to 2019: What Does It Mean for the Finish?

It was an up-and-down week – in that order -- for the market. Early gains led by encouraging corporate earnings announcements and the Fed's more patient approach to further rate hikes were sapped by renewed concerns over trade and global growth. The European Commission cut its outlook for growth in Europe as data have shown sluggishness in Germany and other core euro markets. This, combined with a lack of notable progress in the most recent U.S-China trade negotiations, led to a flat week for U.S. stocks and a decline in global markets. The market has now risen in all but one week this year, as U.S. stocks have staged an impressive rally to start 2019. Stocks rose an impressive 7.9% in January alone, rebounding to within 8% of their all-time highs1.
So what do fast starts tell us about the finish line? We learned as children that "slow and steady wins the race" as the Hare's blazing takeoff (and a healthy dose of hubris) ended in a loss because the Tortoise's measured pace proved more successful. For investors, we think the Tortoise is a better role model. A planned, disciplined approach with a focus on a long-term pace is a successful strategy for reaching the finish line (your financial goals). Fortunately, this means you don't have to measure your progress on a clock or the arbitrary confines of the calendar. Nevertheless, with the stock market kicking off 2019 with a big head start, some January performance perspective can be useful in setting expectations for the track ahead. 

  • A jumpstart the Hare would envy – After a rough finish to 2018 in which the stock market dropped more than 19% from September to December, the market came rushing out of the gates to start this year. Stocks are now up more than 14% since Christmas, thanks to a historic January in which the S&P 500 rose 7.9%. This was the fourth-best January in the last 75 years and the 30th-best month overall during that period (900 months). Looking at those four best Januaries (1975, 1976, 1987 and 2019), the market was down in the month prior three of those times, with an average decline of 4.1%, highlighting the value of staying invested and avoiding knee-jerk reactions to short-term market declines. In fact, this January was the sixth-strongest month during this current 10-year bull market. The market was down by an average of 6.4% in the month prior, a good reminder that the best returns often come on the heels of the worst1
  • Can the market hold a lead? One month a market does not make, but the strong start to the year is encouraging, particularly given the pullback last year. Does a January gain tell us anything about the road ahead? In 64% of all the years since 1944, the market posted a January gain. During that same time period, when the market rose in January, 92% of the time it's gone on to a gain for the year. This suggests that January gains are a positive signal for the year ahead. That said, there have been four years in which the market rose in January but did not go on to a gain for the year (1946, 1966, 2001 and 2018). And a sizable January head start does not guarantee success. In January of 1946 the market rose 7% and January 2018 5.6%, but did not go on to a gain for the year. In our view, it will be trends in GDP, earnings and central bank policy that drive market performance in 2019. We think the bull market in stocks will be sustained this year, but it will be fundamentals, not the calendar, that determines the outcome. Nevertheless, this year's big head start doesn't hurt2
  • More than just a sugar rush – We doubt the strength or steadiness of the recent rally (stocks were up 16 of the previous 22 days coming into last week) will be replicated from here. Last week was a reminder that, despite a still-favorable economic and earnings backdrop, we think the market will experience spells of fatigue. 2019's gains are, in our view, the product of an appropriate rebound in sentiment from December's overly pessimistic market outlook for an approaching recession and excessive fear over future Fed rate hikes. Recent healthy labor-market data along with better-than-expected corporate earnings results have provided better balance between the present risks and opportunities. We haven't seen the last of market volatility, but we think recent gains are supported by fundamentals, not simply a short-term sugar high. 
  • Historical comparisons: a look at track conditions – The last month with a gain as large as January's was October 2015, which jump-started a rally that would see the stock market rise 13% over the following year and 31% over the next two years. In other words, the last time the market posted a gain similar to January's, it was part of a larger rally, not a temporary jump. More broadly, looking back over the past half century, there have been six years in which the market rose by 7% or more in January, including 2019. In those years U.S. GDP growth averaged 3.7%, S&P 500 earnings rose by an average of 5%, and the stock market posted an average total return of 26%.2 Big January gains have historically come in years when the economy and corporate profits were quite healthy, supporting a rising market. While we think conditions will be a bit rockier and market returns more moderate this year, history suggests a positive January is a reason for optimism.

Sources: 1. Bloomberg, performance measured by the price return of the S&P 500 index. 2. Bloomberg, Factset, measured by the S&P 500 index.


Craig Fehr, CFA
Investment Strategist

Index Close Week YTD
Dow Jones Industrial Average 25,106 0.2% 7.6%
S&P 500 Index 2,708 0.0% 8.0%
NASDAQ 7,298 0.5% 10.0%
MSCI EAFE 1,804 -1.3% 4.9%
10-yr Treasury Yield 2.63% -0.05% -0.05%
Oil ($/bbl) $52.73 -4.6% 16.1%
Bonds $107.34 0.3% 1.1%

Source: Bloomberg, 02/08/19. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.


The Week Ahead

The earnings season will start to wind down as 63 companies from the S&P 500 are expected to report earnings next week. In economic news, the inflation report will be released on Wednesday, and retail sales, along with industrial production and consumer sentiment, will be released on Friday.

Important Information

The Weekly Market Update is published every Friday, after U.S. markets close.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.
All content of the Dow Jones Indexes © 2017 is proprietary to Dow Jones & Company, Inc.

Past performance does not guarantee future results.

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Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

This information is approved for use with the public.
It is intended for informational purposes only.
It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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