Despite strong earnings, S&P 500 posts slight decline on trade worries
- 2019-01-28
- By William Lynch
- Posted in Corporate Earnings, Dow Jones Industrial Average, Economy, Federal Reserve, Geopolitical Risks, Interest Rates
The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists. – Benjamin Graham
The S&P 500 Index saw its four-week winning streak halted last week as it closed modestly lower but the Dow Jones Industrial Average and Nasdaq Composite Index bucked the trend to post modest gains. News on Friday that the longest partial government shutdown in U.S. history finally ended after 36 days had little effect on the stock market, which had risen 10% since the shutdown began. Political differences rarely have much effect on stocks and this time was no different as the market ignored the shutdown and focused on the economy and earnings, which remain mostly positive. Although the fourth quarter earnings season is still early, over 70% of S&P 500 companies that have reported have beaten analysts’ estimates. Blue chips such as IBM, United Technologies, Procter & Gamble and Starbucks were just a few of the companies that announced strong earnings last week. But uncertainties remain over global economic growth and trade relations with China as well as another government shutdown as the deal to reopen and fund the government is temporary and only lasts three weeks. Data from China showed that their economy grew only 6.6% last year, which was the slowest growth in 28 years. The International Monetary Fund (IMF) also trimmed its global growth forecast to 3.5% from 3.7%. Adding to the uncertainty were conflicting reports on trade talks between the U.S. and China. Earlier in the week, Commerce Secretary Wilbur Ross said that the U.S. and China were not close to reaching a trade deal and that a number of issues still had not been resolved. The next day, however, Treasury Secretary Steven Mnuchin said that both sides were “making a lot of progress” in reaching a possible trade agreement. The S&P 500 has risen over 13% from its low on Christmas Eve, but further gains may be limited over the near-term unless uncertainty over trade with China and global growth is eliminated.
Last Week
U.S. existing home sales fell to their lowest level in three years in December and home price increases slowed sharply. Leading economic indicators in December declined slightly, matching expectations, and suggested that U.S. economic growth will probably slow this year to about 2% by year-end. Weekly jobless claims fell to 199,000, their lowest level in 49 years.
For the week, the Dow Jones Industrial Average edged up 0.1% to close at 24,737 and the S&P 500 Index slipped 0.2% to close at 2,664. The Nasdaq Composite Index ticked up 0.1% to close at 7,164.
This Week
The January employment report is expected to show that about 171,000 new jobs were created and that the unemployment rate fell to 3.8% from 3.9%. Fourth quarter gross domestic product (GDP) is expected to show growth of 2.7% and the January ISM Chicago Purchasing Manager’s Index (PMI) is expected to drop from the December reading but still be comfortably in expansion territory. Both the January consumer confidence index and the Michigan consumer sentiment index should approximate last month’s readings and show that consumers remain optimistic about their jobs and economic prospects.
The Federal Open Market Committee (FOMC) meets this week and is expected to keep the federal funds rate unchanged between 2.25% and 2.50% after raising the rate four times last year by a quarter of one percent each time.
Among the most prominent companies scheduled to report earnings this week are Caterpillar, 3M, Boeing, GE, Honeywell, Verizon, AT&T, Pfizer, Merck, Amgen, Apple, Facebook, Microsoft, Amazon, McDonald’s, Visa, Exxon Mobil and Chevron.
Portfolio Strategy
While it is widely expected that the Federal Open Market Committee (FOMC) will leave interest rates unchanged this week, what’s more important will be the policy statement issued by the Fed and the press conference held by Federal Reserve Chairman Jerome Powell. After the quarter of one percent interest rate hike in December, Chairman Powell has become dovish in his tone and has said that the Fed would be “patient” in tightening monetary policy. Even though the Fed has forecast two interest rate hikes for 2019, Powell said that he would keep an open mind with regard to future increases and stressed that there would be no pre-determined path for rate hikes. Instead, the Fed would rely on economic data as it’s presented to formulate its monetary policy. With inflation running below the Fed’s target of 2% and economic growth expected to slow, the Fed has also considered ending the runoff of its portfolio of U.S. Treasury and Federal Agency mortgage securities on its balance sheet. Such a move would provide more liquidity in the financial system. The partial government shutdown also could influence the Fed’s policy. With several key pieces of economic data not released because of the shutdown, Fed officials are left with less information with which to make an informed decision and are more apt to error on the side of easier monetary policy. One of the market’s biggest fears, an aggressive Federal Reserve and higher interest rates, seems to have been eliminated. Many economists are now predicting that the Fed will only raise rates once this year and the odds of just one rate hike have shrunk dramatically.
Recent Posts
Archives
- December 2024
- October 2024
- September 2024
- August 2024
- July 2024
- June 2024
- May 2024
- April 2024
- March 2024
- February 2024
- January 2024
- December 2023
- November 2023
- October 2023
- September 2023
- August 2023
- July 2023
- June 2023
- May 2023
- April 2023
- March 2023
- February 2023
- January 2023
- December 2022
- November 2022
- October 2022
- September 2022
- August 2022
- July 2022
- June 2022
- May 2022
- April 2022
- March 2022
- February 2022
- January 2022
- December 2021
- November 2021
- October 2021
- September 2021
- August 2021
- July 2021
- June 2021
- May 2021
- April 2021
- March 2021
- February 2021
- January 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- July 2020
- June 2020
- May 2020
- April 2020
- March 2020
- February 2020
- January 2020
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- June 2019
- May 2019
- April 2019
- March 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
Categories
- Commodities
- Corporate Earnings
- Covid-19
- Dow Jones Industrial Average
- Economy
- Elections
- Emerging Markets
- European Central Bank
- Federal Reserve
- Fixed Income
- Geopolitical Risks
- Global Central Banks
- Interest Rates
- Municipal Bonds
- Oil Prices
- REITs
- The Fed
- The Market
- Trade War
- Uncategorized