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2019's First Week Closes Strong...This Week's 7 Things to Know About the Markets & the Economy

1. Weekly Market Update:  The first week of 2019 closed out with a sharp Friday rally spurred on by welcome developments on interest rates, trade and the economy.  Dovish Comments from Federal Reserve Chairman Powell mid-day on Friday added another 500 Dow points to the rally.  Positive news on three of the four major issues affecting markets helped us to close the week solidly in the green. Aside from the Fed, Trade and the latest economic reports, the last key factor causing concern is the corporate earnings season which will be a focal point in the coming weeks. The biggest gainers this week were mainly last year’s biggest losers: MLPs were up 8.13% and Commodities were up 2.21%. In Equities, Small Caps, International Developed and Emerging Markets performed the best closing up 2.46%, 1.92% and 1.61% respectively.

2. Recapping 2018, Perspective & Sentiment:Large Cap Stocks: For 2018, the S&P 500 lost 4.4% (total return) during 2018, breaking a streak of 9 consecutive “up” years. The S&P 500 has gained an average of +9.8% per year (total return) over the last 50 years.  Small Cap Stocks: The Russell 2000 stock index lost 11.0% (total return) in 2018. The small cap index has gained +9.0% per year over the last 35 years. Foreign Stocks: The international stock index EAFE lost 13.8% (total return) in 2018. The foreign stock index has gained +8.2% per year over the last 35 years.  Bonds: The taxable bond market (Bloomberg Barclays US Aggregate Bond Index) was up a miniscule +0.01% in 2018 (total return) but has gained +5.1% per year (total return) over the last 25 years. Interest Rates -The yield on the 10-year Treasury note ended 2018 at 2.68%, up 0.27 percentage points from the 2.41% it finished at on 12/31/17. Oil Prices - The price of oil ended 2018 at $45.41 a barrel, down 24% from its 2017 close of $60.12.  Despite lower asset valuations, Investor Sentiment as measured by CNN’s Fear & Greed Index is still at an “Extreme Fear” reading. Investor mindsets have rarely been this bearish.

3. Economic Mixed Signals:  Today’s Labor reports were outstanding. The Non-Farm Payrolls report indicated that the US economy added a whopping 312,000 new jobs last month, 77% higher than the 155,000 expected new jobs number. November job gains were revised upwards as well. The unemployment rate ticked up slightly to 3.9% but this was viewed positively as more people entered the work force.  The work force participation numbers are very robust and real wages are growing (3.2% annual rate) for the first time in a decade.  Now for the less rosy news: Earlier in the week we learned that China’s PMI (manufacturing Purchasing Managers’ Index) came in under the 50 level that signals an economic expansion.  This week China’s economy took center stage and will continue to be a key focal point. The U.S. got its own PMI on Thursday, it dropped to its lowest point since September 2017. At 53.8, the index still shows growth in the manufacturing sector but the rate of growth is slowing.

4. Earnings Season Looms: JP Morgan will be the first major company to report earnings the week after next.  Until then, we should expect preliminary announcements from companies adjusting their forecasts.  Apple preannounced slowing sales this week which dampened investor’s appetite for international large caps with significant overseas sales.  Is Apple a canary in the global economy? How will other companies with significant exposure to China fare in earnings season?  We’ll find out in the coming days and weeks. Nike, who also has significant sales in China, made positive revenue comments this week. Note that Mid Cap and Small Cap stocks, which have considerably less foreign sales, outperformed Large Cap stocks this week. The strength of the domestic economy is buoying these lower market caps.

5. Trade: Good News for Now:  Deputy U.S. Trade Representative Jeffrey Gerrish will lead a delegation to talk with Chinese counterparts on Monday in the first meeting of the two sides since a 90-day truce was agreed in Argentina last month. While the initial talks will be technical in nature, U.S. Trade Representative Robert Lighthizer is expected to meet with Chinese Vice Premier Liu He, President Xi’s top economic adviser, later this month.

6. Government Shutdown: President Donald Trump invited Congressional leaders across parties to the White House today but to no avail…. No trade deal was reached. As expected Reps Pelosi and Schumer put their spin on the standoff…It’s Don’s fault. President Trump pointed the finger in the other direction. Both sides agreed to try to iron things out this weekend while President Trump is on record suggesting he’ll oversee a long shutdown if he has to. The history of past shutdowns tells us that there have been 21 government shutdowns including this one. The first was in 1976 under President Ford. President Carter endured five shutdowns, while President Reagan experienced eight. There was one during President H.W. Bush's term, and two during Clinton's time in office, including the longest shutdown, 21 days in 1995. President Obama suffered one 16-day closure; this is the third during Trump's presidency. At 13 days, it's the third longest. Overall, the market seems to key on other factors for importance. The stock market’s performance during shutdowns has been slightly positive. 

7. Asset Allocation Stress: The recent rapid swings in asset prices has caused large asset allocators (pensions, endowments, insurance companies, etc.) quite a bit of short term stress. When evaluating the relative merits of the bell weather US Treasury bond (TNX below tracks the yield), an insurance company would much rather have the 3.25% yield available two months ago over today’s 2.6% yield which is 20% lower.  Stock price earnings ratios, which recently traded at 22 times earnings, are now over 30+% lower at to 14-15 times earnings.  An asset allocator must move quickly.  Right now these investors see bonds as expensive and stocks as cheap.

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