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Dow rises for 6th straight week on strong earnings, dovish Fed comments

It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that. – Charlie Munger

The Dow Jones Industrial Average extended its winning streak to six consecutive weeks with a gain of 327 points as stocks benefited from better than expected quarterly earnings, a strong jobs report and a dovish Federal Reserve. The Dow ended the month with a gain of 7.2%, its best January performance since 1989, and helped investors erase the memory of December’s market plunge. It was the busiest week of the earnings season and it began on a sour note as Caterpillar and computer chip manufacturer Nvidia reported weaker than expected earnings and issued disappointing guidance. Both companies blamed worsening economic conditions in China for their shortfall and the broad market traded lower in sympathy. But profit reports from Boeing, Apple and Facebook later in the week were stronger than forecast and set a positive tone for the stocks. The market also received a boost from the Federal Open Market Committee (FOMC), which left the federal funds rate unchanged at between 2.25% and 2.50% and emphasized that it would be patient in making future interest rate decisions.  The Fed also said that it would make adjustments to the planned reduction of its bond portfolio and would ensure that there is an ample supply of bank reserves. It acknowledged that reduced inflation pressures, slower global economic growth and geopolitical uncertainties were reasons to be cautious in its approach. In December, Federal Reserve Chairman Jerome Powell had said that the reduction of its bond holdings was on “autopilot”, a statement that was partly responsible for the plunge in stock prices. The Fed also withdrew its statement that further interest rate hikes would be warranted and added that the case for raising rates had “weakened”. If that wasn’t enough good news, the January employment report showed that 304,000 new jobs were created compared to 170,000 that were forecast. Although the unemployment rate ticked higher from 3.9% to 4.0%, the increase was attributed to the longest government shutdown in history and a larger workforce as more people looked for jobs. Wage growth may have been disappointing, but the employment cost index in the 4th quarter of 2018 showed a gain of 3.1% in wages and salaries, the first time this quarterly index had been over 3% in more than 10 years.

Last Week

While new home sales in November soared nearly 17% from the previous month, pending home sales in December were weaker than expected due to stock market volatility, high home prices and higher mortgage rates. Weekly jobless claims jumped to 253,000, an increase of 53,000 and much higher than expected, but the increase was likely due to seasonal factors that should be temporary. The final January ISM manufacturing index was strong and better than expected while the final University of Michigan consumer sentiment index was in line with previous readings.

For the week, the Dow Jones Industrial Average gained 1.3% to close at 25,063 and the S&P 500 Index jumped 1.6% to close at 2,706. The Nasdaq Composite Index rose 1.4% to close at 7,263.

This Week

It will be a quiet week for economic data as November factory orders are expected to rebound with a modest gain after falling in October and weekly jobless claims are forecast to be 220,000, a decline of 33,000 from last week.

With the government shutdown over, President Trump is scheduled to deliver the State of the Union Address before a joint session of Congress on Tuesday night,

Among the most notable companies scheduled to report earnings this week are Alphabet (Google), Sysco, Archer Daniels Midland, Philip Morris International, Walt Disney, Viacom, Emerson Electric, Allstate, MetLife, Eli Lilly, Cardinal Health, General Motors and Phillips 66.

Portfolio Strategy

There is an old Wall Street adage for the month of January that says “so goes January, so goes the year”. Since 1950, this barometer based on January’s performance has accurately forecast performance for the year nearly 90% of the time. Of course, before one becomes too confident in its predictive ability, as recently as last year the S&P 500 Index lost 4.4% despite a gain of over 5% in January. Not since 1987 has this broad-based index performed so well in January, posting a gain of almost 8%. Another reason for optimism this year involves taking into account the first five days of January as well as the so-called Santa Claus rally period, which is defined as the last five days of the year and the first two trading days of January. When these two periods are positive along with a positive January, the S&P 500 Index has recorded positive annual returns 90% of the time. Heading into February of last year, optimism was widespread as global economic growth was strong, consumer confidence was at all-time highs and earnings were expected to be exceptional. Yet the stock market suffered a sizable correction in February. This year the market faces slowing global growth, weakening earnings, trade tensions with China, a government shutdown and worries about a possible recession. Much of the strong January performance has been the result of a rebound from extremely oversold conditions in December as sentiment was decidedly negative. A dovish Federal Reserve and better than feared earnings results have changed market sentiment, though, and it could get a further boost from a trade deal with China.