Market Commentary: Market Recap
New year kicks off with stock market rebound
Markets around the world had a great start to 2019. In the U.S., the Nasdaq Composite led with a return of 9.79 percent. The S&P 500 and Dow Jones Industrial Average (DJIA) returned 8.01 percent and 7.29 percent, respectively. These gains helped offset December losses and led to the best January in years.
Earnings growth helped drive this rebound. According to FactSet, the blended average earnings growth rate for the S&P 500 for the fourth quarter is 10.9 percent. But this may be the last quarter of double-digit growth for a while. Analysts are forecasting single-digit growth for the next three quarters.
From a technical perspective, all three major U.S. indices moved closer to their 200-day moving averages in January. The DJIA finished above its trend line, while the S&P 500 and Nasdaq finished near their moving averages. U.S. markets have been below these technical levels for several months, and a sustained break above them would indicate a more positive investor outlook for the U.S.
The international story was similar. The MSCI EAFE Index gained 6.57 percent in January, and the MSCI Emerging Markets Index gained 8.78 percent. The developed market index remained below its trend line, but the emerging markets index closed above its moving average for the first time since May 2018.
Even fixed income had a positive month. The Bloomberg Barclays U.S. Aggregate Bond Index gained 1.06 percent, and the Bloomberg Barclays U.S. Corporate High Yield Index was up 4.52 percent. The potential for future rate hikes has subsided, helping fixed income performance.
Despite uncertainty, economic growth continues
In January, we saw the end of the longest government shutdown in U.S. history. There was also progress on China trade talks. But the potential for uncertainty remains, especially with another possible shutdown.
The fundamental economic data was positive. Overall, 304,000 new jobs were added during the month, above expectations for 165,000. Unemployment rose to 4 percent, although this increase was due to the shutdown and should reverse next month. Year-over-year job growth steadily improved in 2018 following declines since 2015 (see Figure 1). It continues to do so to start off 2019.
Figure 1. Year–Over–Year Growth in Private Workers, 2010–2019
Manufacturing and industrial production beat expectations in December, due to increased vehicle production. Manufacturing saw 1.1-percent monthly growth against expectations for just 0.3 percent. Given slowing global growth, a strong dollar, and trade concerns, these figures show U.S. manufacturing continues to move forward.
Another positive was weaker-than-expected consumer and producer inflation. Both are near the Fed’s targeted 2-percent inflation goal. Slowing growth in inflation means that the Fed may be more gradual if and when it decides to hike again.
Much of December’s and January’s data was delayed by the government shutdown. But the data we did see was mostly positive. Once we get the full story, we’ll likely see a healthy economy expanding at a solid pace.
Risks remain, especially in the short run
Although the economy is solid, there are short-term risks. The most pressing is another government shutdown. Investors should be prepared for any potential volatility.
Consumer and business confidence levels dropped in January during the last shutdown but rebounded slightly once it ended. Another shutdown might lead to further declines. Here, sustained weakness could lead to lower spending levels in the long run.
Another area of concern is housing. In December, pending home sales fell by 9.8 percent. This capped a year in which pending home sales declined on a year-over-year basis every month.
International risks also remain, with Brexit negotiations and a slowdown in Chinese growth dominating the headlines. These are longer-term issues but are not necessarily immediate sources of volatility for U.S. markets.
Solid start for 2019
Strong market performance in January and solid economic data show that the U.S. continues to be a healthy environment for investors. There is the potential for more volatility in the short term. But over the long term, a strong economy continues to be supportive of markets.
As always, a well-diversified portfolio with a time horizon matching your goals remains the best path to achieve those goals going forward.
All information according to Bloomberg, unless stated otherwise.Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.