Weekly Market Update (February 11, 2019 – February 15, 2019)

By Nela Richardson February 15, 2019

Stocks extended their recent rally with the S&P 500 rising 2.5% for the week, leaving the index less than 6% off its all-time high1. Continued optimism regarding the U.S. - China talks and an agreement to avert a government shutdown provided investors with enough reasons to increase their appetite for risk. Economic news was mixed, with the Bureau of Labor Statistics reporting a surge in job openings, while retail sales and industrial production disappointed. January marked the 10th consecutive month in which there were more job openings than unemployed workers, more evidence of a tight labor market. On the flip side, retail sales slumped in December, falling 1.2% over the prior month, the biggest decline since 2009. This reported softness is in stark contrast with other data that point to strong holiday sales. As the economic cycle matures, we expect a more balanced mix of encouraging and underwhelming economic readings.
Source: 1. Bloomberg

Optimism on China Trade Talks Outweighs Other Mixed Signals  

Positive developments in the trade talks with China were the fuel that kept global stocks rising last week, temporarily pushing worries about slowing economic and earnings growth into the background. Disappointing declines in retail sales and industrial output appeared to be due to short-term disruptions, and despite mixed earnings results, we think company outlooks were generally reassuring. Investors became more optimistic that continuing progress in resolving trade tensions could provide the impetus for better global economic growth as well as rising earnings over time.  

Solid Progress in China Trade Talks, but Issues Remain

Reports of significant progress in resolving the trade tensions with China were good news for investors, who have been concerned about current conditions as well as the additional negative impacts of a higher 25% tariff rate scheduled to go into effect on March 1. Reports that the deadline could be extended by 60 days to allow more time to hash out an agreement were also positive. But difficult issues remain, and progress may not continue to be as quick or smooth as it has been recently, leading to periodic worries and volatility in response.  We believe a trade agreement, even if long in the making, would add a catalyst for better global economic growth to other positive drivers for international investments, including attractive valuations, low unemployment in the eurozone, higher dividends and earnings relative to U.S. equities, and our expectation for a flat to weakening dollar. For these reasons we recommend broad-based international equities for long-term investors.

Economic Releases Contain More Noise, Fewer Signals

Job openings reached a record high in December, another signal of a strong job market that we think will be a key support for modest economic growth ahead. But other economic indicators suggested slowing conditions.  Weaker-than-expected retail sales and industrial production prompted economists to lower their estimates for economic growth and raised recession concerns.  However, we think both indicators reflected more noise rather than being a true signal of weaker economic conditions ahead. 

  • Retail sales decreased sharply for December, traditionally the biggest month of the year for consumer spending. The drop appeared to be mostly due to the impacts of the government shutdown and declining stock prices, and thus spending is likely to rebound in the coming months due to rising consumer confidence and improving financial conditions. 
  • January's decline in industrial production was concentrated in automotive production, which is extremely volatile, making it less likely to be a good signal about overall manufacturing strength. In addition, the ISM manufacturing index, another measure, showed solid gains in January. 
  • Consumer prices were up 1.6% in January, a 19-month low that was pulled down by declining energy prices over the month. The less volatile core CPI, which removes energy and food prices, stayed at 2.2%, as it has for the past five months.  This stable increase in consumer prices is right in line with the Fed’s 2% target. Moderate inflation gives the Federal Reserve latitude to be patient in hiking rates and could help extend the bull market, in our view1.

We think many economic releases over the next few months could contain more noise than usual due to the recent government shutdown, the stock market pullback in December, and recent winter storms. When the economic news is mixed and noisy, it's important for investors to stay focused on the longer-term indicators which continue to suggest slower but still positive growth ahead. 

Earnings Growth Slowing as Expected  
With two-thirds of S&P 500 companies having reported fourth-quarter results so far, earnings are on track to have grown 13% from a year ago, marking the fifth straight quarter of double-digit earnings growth1. Though strong by historical standards, this rate signals a longer-term downshift in earnings growth this year. Moreover earnings increased last year even as equity returns fell 4.2%, setting the stage, in our view, for positive equity returns in 2019 but lower than the 9.8% average return over the past 3 years2.

Reassuring Signals Reduced Major Concerns

Stocks have provided strong returns so far this year, as worries about continuing Federal Reserve interest rate increases and trade disruptions have lessened.  Those were two of the three major concerns that triggered December's pullback.  Over the past few weeks, concerns that the Federal Reserve would continue to raise short-term rates too quickly or too much have diminished as the Fed has indicated it will be patient, cautious and wait to raise rates.  Progress in the trade negotiations with China soothed fears about trade disruptions and higher tariffs ahead.  And while there are still worries about slower economic and earnings growth, recent signs suggest both remain positive- and near longer-term average rates. 

The rebound from December's sell-off has been supported by still-healthy earnings and economic conditions, and the price-to-earnings ratio for the S&P 500 is in line with its 20-year average, making U.S. large-cap stocks attractively valued, in our view.  Moreover, opportunities exist in small- and midcap and international equities, which we think are trading at attractive valuations to large-cap stocks and to their own histories1.

We continue to expect uncertainty tied to Fed actions, politics and trade talks, and slowing global growth will continue to add volatility, but the positive fundamentals and valuations suggest a rocky but rising road ahead for stocks.  This week, the short-term noise in the economic data was overshadowed by the progress in the trade negotiations.  But if the noise, uncertainty and volatility become louder, remember what's important to you – your long-term goals -- and ignore the short-term noise.

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

Nela Richardson, PhD
Kate Warne, PhD, CFA
Investment Strategists

Index Close Week YTD
Dow Jones Industrial Average 25,883 3.1% 11.0%
S&P 500 Index 2,776 2.5% 10.7%
NASDAQ 7,472 2.4% 12.6%
MSCI EAFE 1,840 1.9% 7.0%
10-yr Treasury Yield 2.66% 0.03% -0.02%
Oil ($/bbl) $55.75 5.7% 22.8%
Bonds $107.30 0.0% 1.0%

Source: Bloomberg, 02/15/19. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

The Week Ahead

U.S. markets are closed on Monday for President's Day. In this holiday-shortened week, major events include the release of the minutes from the January Federal Open Market Committee (FOMC) meeting on Wednesday and the flash PMIs reported on Thursday.

Review last week's weekly market update.

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.

Diversification does not guarantee a profit or protect against loss.

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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