Dow, Nasdaq up for 9th straight week on China trade optimism

As I see it, a superior yield at least lets you snack on hors d’oeuvres while waiting for the main meal. – John Neff

The stock market continued its winning ways again last week even though economic data was mostly negative and no trade agreement was reached between the U.S. and China. Both the Dow Jones Industrial Average and the Nasdaq Composite Index have risen for nine consecutive weeks that began in the last week of the year. Neither benchmark has registered a weekly decline in 2019, which is rather remarkable given the continued uncertainty with regard to trade, Federal Reserve monetary policy, geopolitical risks and slowing global economic growth. Hope springs eternal and investors right now are optimistic that a trade deal with China will occur, even though the deadline of March 1^st is fast-approaching. U.S. tariffs of 10% on $200 billion of Chinese goods will increase to 25% if no deal is made by this Friday. President Trump, however, has indicated that there is nothing final about the deadline and it could be extended. In addition to confidence that a deal will be struck, minutes released from the most recent Federal Reserve meeting provided investors with another reason to be optimistic. Although opinions were equally divided about some issues, all Fed officials agreed that being patient was warranted at this time. Some officials felt that interest rate hikes would be justified only if inflation increased while other officials thought that higher rates would be needed if economic growth accelerated. They also all acknowledged the many downside risks to the economy, including slowing global economic growth, particularly in China and Europe, reduced fiscal stimulus and further tightening of financial market conditions.  For these reasons, they concluded that it was important to remain accommodative, agreeing to stop reducing the balance sheet, if necessary, by the end of the year. The widespread pessimism that existed in December has turned into unbridled optimism this year and the Fed’s dovishness has been partly responsible for the change in sentiment.

Last Week

Economic data released last week was mostly worse than expected. Existing home sales in January declined for the third straight month and fell to a three-year low and the Philly Fed manufacturing index dropped into negative territory in February for the first time in nearly three years. January leading economic indicators also fell for the second straight month but the data was incomplete as three components were missing due to the government shutdown. Although durable goods orders rose in December, core capital goods orders that exclude aircraft declined and were less than expected, suggesting that business spending on equipment will continue to weaken. The only positive piece of economic data was the National Association of Home Builders Index in February, which reached a four-month high as lower interest rates boosted consumer confidence and builder sentiment.

For the week, the Dow Jones Industrial Average rose 0.6% to close at 26,031 and the S&P 500 Index also gained 0.6% to close at 2,792. The Nasdaq Composite Index added 0.7% to close at 7,527.

This Week

The preliminary estimate for fourth quarter gross domestic product (GDP) is expected to be 2.5%, compared to 3.4% in the third quarter of 2018. The February Chicago Purchasing Manager’s Index (PMI) is forecast to be strong and higher than in January while December housing starts are also forecast to be higher than the previous month. Both the final February consumer confidence index and the University of Michigan consumer sentiment index should also be higher.

Federal Reserve Chairman Jerome Powell is scheduled to deliver the semiannual Monetary Policy Report and testify before the Senate and the House this week.

Among the most prominent companies scheduled to report earnings this week are JM Smucker, Campbell Soup, Home Depot, Lowe’s, Macy’s, TJX Companies, Gap, Nordstrom, Best Buy, AutoZone, Chesapeake Energy, HP, Autodesk and Marriott International.

Portfolio Strategy

The major stock averages are more than making up for losses suffered in 2018 and the year is not even two months old. This is the first time since 1964 that the Dow Jones Industrial Average has posted gains in each of the first eight weeks to start the year and the first time ever that the Nasdaq Composite Index has accomplished this feat. The technology-heavy Nasdaq was founded in 1971. During this time, the Dow has rallied 13%, closing above the 26,000 level for the first time since November 9^th, while the Nasdaq has risen 14%. The broad-based S&P 500 Index has climbed nearly 12% and has had only one losing week since the beginning of the year. Only two months ago, stocks recorded their worst December since the Great Depression. Since that time, economic data has been mixed and fourth quarter earnings results have generally been positive, although first quarter earnings are expected to decline slightly. What has really changed has been investor sentiment, which has gone from decidedly negative to overwhelmingly positive as the market continues to climb a proverbial wall of worry. Investors are choosing to look at the glass as being half full rather than half empty and are believing that issues such as trade with China, Fed policy and slowing global growth will eventually be resolved in a favorable way.