The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently. – John Bogle
A combination of strong fourth quarter earnings and optimism over U.S.- China trade talks propelled the major stock averages to their fourth consecutive weekly gain. It has been the best start to a year for the S&P 500 Index since 1987 and has helped ease the pain from the dismal performance in the month of December. The first week of earnings season was dominated by the financials and, for the most part, their earnings results exceeded expectations. Companies such as Goldman Sachs, Bank of America, Wells Fargo and Citigroup all beat analysts’ estimates and even those that fell short, like JP Morgan Chase and BlackRock, saw their stocks close higher on the trading day, an encouraging sign. In addition to better than expected results on the earnings front, the news on trade talks between the U.S. and China improved as the week went on. Weaker than expected December trade data from China released on Monday prompted fears of a global growth slowdown and a U.S. trade representative said that little progress had been made in trade talks with China the previous week. By the end of the week, though, the news had improved considerably. There were reports that the U.S. was planning to ease tariffs during trade negotiations. By Friday, optimism over a possible trade deal peaked as there were reports that China offered to increase purchases of U.S. imports over six years to reach more than $1 trillion per year. If true, the deal would seek to reduce the annual U.S. trade deficit to zero by 2024. In retrospect, it appears that the stock market sell-off in December was overdone and based mostly on fear and pessimism than fundamentals, which may have weakened but are still mostly solid.
The producer price index (PPI) in December fell more than expected and registered its first decline since February 2017 primarily because of lower gas prices. In the 12 months through December, the PPI has increased 2.5%. Import prices in December also dropped as oil prices tumbled and a strong dollar reduced prices of other goods. The University of Michigan consumer sentiment index recorded its worst reading since October 2016 due to the partial government shutdown, financial market volatility and uncertain Federal Reserve monetary policies.
The Federal Reserve Beige Book showed that most Fed districts reported modest to moderate growth in December and early January but were less optimistic about the future due to increased market volatility, rising short-term interest rates, falling energy prices and increasing trade and political uncertainty.
For the week, the Dow Jones Industrial Average climbed 3% to close at 24,706 and the S&P 500 Index jumped 2.9% to close at 2,670. The Nasdaq Composite Index rose 2.7% to close at 7,157.
The calendar for economic data will be light this week as December existing home sales are expected to be consistent with the previous month and leading economic indicators are expected to be flat after posting a slight increase in November.
Both the Bank of Japan (BOJ) and the European Central Bank (ECB) make monetary policy decisions this week with the BOJ expected to keep its benchmark interest rate at minus 0.1% and the ECB forecast to maintain its key interest rate at minus 0.4%.
Among the most notable companies scheduled to report earnings this week are Procter & Gamble, Starbucks, Comcast, IBM, Intel, Texas Instruments, United Technologies, Ford Motor, Travelers, Northern Trust, Johnson & Johnson, Abbott Labs, Bristol Myers Squibb, Raytheon and Union Pacific.
After a brutal December in which stocks suffered their worst losses since 1931 during the Great Depression, the market has risen steadily and has now recovered more than 13% of its losses from the lows on Christmas Eve. The decline of the S&P 500 Index from its high in late September to its low was nearly 20% and the subsequent recovery may be a sign that the worst is over. It now appears that the sell-off in December was an overreaction to fears about a global economic slowdown, trade tensions with China and an aggressive monetary policy by the Federal Reserve. All of these fears created a tremendous amount of uncertainty, which led to panic-like selling by investors and increased volatility which, in turn, created even more fear. The biggest worry was that of a recession, which could be caused by a prolonged trade war with China or a policy mistake by the Federal Reserve. But since the end of the year, the Fed has reassured investors that it does not have a pre-determined path for raising interest rates and that it will be sensitive to future economic data when making its decisions. There also has been positive news with regard to trade talks between the U.S. and China, which has reduced fears that a trade war could cause a global recession. But economic growth is expected to slow this year and corporate earnings are expected to be weaker. Both are still forecast to be positive, though, which should result in higher stock prices provided geopolitical risks such as trade tensions and a prolonged government shutdown are resolved sooner rather than later.