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S&P 500 closes above 2,800 over progress in U.S. & China trade talks

Successful investing professionals are disciplined and consistent and they think a great deal about what they do and how they do it. The investor’s chief problem and even his worst enemy is likely to be himself. – Benjamin Graham

In another week marked by conflicting signals from the economy and mixed messages on the geopolitical front, both the S&P 500 Index and the Nasdaq Composite Index closed modestly higher while the Dow Jones Industrial Average was virtually flat. For the most part, the news surrounding a possible trade deal between the U.S. and China continued to be positive as President Trump postponed the March 1st deadline that would have meant higher tariffs on Chinese goods. The Trump administration cited substantial progress in the talks that included intellectual property protection and technology transfer issues. But any deal was far from certain as enforcement measures have yet to be agreed upon. Federal Reserve Chairman Jerome Powell also made positive comments in his testimony before both the House and Senate. He said that although the economy was healthy and the economic outlook was favorable, there still were areas of concern and stressed that policy decisions would be data dependent. Slowing growth in China and Europe, uncertainty over Brexit negotiations and ongoing trade talks with China were just a few of his worries. There was other geopolitical news last week that also may have weighed on the stock market. President Trump and North Korean leader Kim Jong Un failed to sign an agreement in Vietnam over denuclearization of the Korean peninsula in exchange for U.S. sanction relief. As this meeting took place, tensions rose along the Kashmir border between India and Pakistan and worries spread that the initial conflict would escalate into something far more serious. All of this occurred against a backdrop of mixed quarterly earnings reports and economic data that offered no clear picture about what lies ahead for the U.S. economy or corporate profits.

Last Week

On a positive note last week, the U.S. economy grew at an annualized rate of 2.6% in the fourth quarter, which was better than expected. The February Chicago Purchasing Manager’s Index (PMI) was also strong and registered its largest increase in a year while consumer confidence in February rebounded in a big way as consumers remained optimistic about the economy. On the negative side, housing starts in December fell to their lowest level in more than two years due to increased home prices and higher mortgage rates, both of which reduced affordability.  Although pending home sales rose in January, they were actually lower than a year ago. The ISM manufacturing index in February and factory orders in December were also both weaker than expected. Finally, the personal consumption expenditures (PCE) index, the Fed’s preferred inflation measure, rose slightly and is up only 1.9% over the last year.

In corporate news, Danaher agreed to buy the biopharmaceutical business of General Electric for $21.4 billion and Barrick Gold announced a plan to acquire Newmont Mining for $7 billion in an all-stock deal.

For the week, the Dow Jones Industrial Average was virtually flat and closed at 26,026 and the S&P 500 Index rose 0.4% to close at 2,803. The Nasdaq Composite Index gained 0.9% to close at 7,595.

This Week

The February employment report will be released on Friday and expectations are for 180,000 new jobs and for the unemployment rate to dip to 3.9% from 4.0%. The ISM non-manufacturing or services sector index in February is expected to top the reading in January and be comfortably in expansion territory above 50.  December construction spending is expected to increase modestly but less than the gain in November while December new home sales should be less than the number of units reported in November but still healthy.

The European Central Bank (ECB) makes its monetary policy decision and is widely expected to leave its benchmark interest rate unchanged at negative 0.4% as economic growth is forecast to slow.

Retailers will dominate this week’s earnings reports and the most notable of these include Target, Kohl’s, Costco Wholesale, Kroger, Dollar Tree, Abercrombie & Fitch, American Eagle Outfitters and Barnes & Noble.

Portfolio Strategy

This week marks the ten-year anniversary of the current bull market, which began on March 6th, 2009 when the S&P 500 Index reached an intra-day low of 666. Since that time, the S&P 500 has risen to 2,803, a gain of over 300%. The question now becomes whether or not the S&P 500 can hold this level and add to its gains. While the age of a bull market doesn’t matter, there are signs that the economy is slowing. After a fairly strong fourth quarter, growth is expected to decline to about 1% in the first quarter before rebounding to above 2% in the second quarter. Economic data in recent weeks has generally been weaker than expected so Friday’s jobs report will carry added significance. After adding over 300,000 new jobs in January, estimates for job growth in February are about 180,000 with a slight drop in the unemployment rate and a moderate increase in wages. It’s perfectly normal for job growth to weaken after such a huge upside surprise in the previous month and any number above 150,000 new jobs would be considered a solid and healthy number. With the economy slowing and inflation running below the Fed’s target of 2%, the Federal Reserve has signaled it can afford to be patient with regard to raising interest rates. Stronger than expected wage growth in the employment report, though, could be a sign that inflationary pressures are building and might prompt the Fed to pull the trigger.