February Economic Update

Market Summary

Market sentiment and optimism has swung 180 degrees from just one month ago. The last quarter of 2018 saw the major U.S. indices take a sudden and unexpected swing to the downside. The begin 2019, we’ve seen almost nothing but upside to start the year and regain much of December’s losses.

The S&P 500 advanced 7.87% in January, with a new earnings season as well as trade and monetary policy developments providing tailwinds. Most of the economic data that rolled in was good, recent employment numbers were stellar, and the partial federal government shutdown may have negatively impacted some of the numbers. (1)

The "Fed" and Trade Talks

Last month we noted a few positive developments which must occur to help turn the market around. The Federal Reserve delivered on one of them by leaving interest rates unchanged in January. However, what really intrigued investors was the “dovish” tone of the Fed’s latest policy statement. It noted that the Federal Open Market Committee would be “patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate” for the economy. The central bank appeared newly cautious: language implying that rate hikes might be merited was now absent.

Another large boost to the markets provided by the Fed was their decision regarding balance sheet assets. In short, the Fed took many troubled assets onto their books during the 2008/2009 Great Recession to ease financial strain and spur economic growth. Last year, they began selling these assets back into the market. Many were concerned that this was placing too much selling pressure onto the markets, especially during the decent down swings. In January, the Fed stated that they would slow down the liquidation of these assets, which was music to Wall Street’s ears. (2)

In mid-January, China made a move in the U.S.-China trade dispute. It offered a plan to address the U.S. trade deficit, with an objective of cutting it to $0 by 2024. China would undertake a strategy to buy greater amounts of American goods: $45 billion more during 2019, and gradually, more in each of the following five years, with the multiyear increase reaching $1 trillion. Bloomberg News reported that U.S. negotiators wanted China to try and wipe out the trade imbalance within two years, not six. American demand for Chinese-made products is so strong, however, that making any real dent in the trade deficit might be a tall order, given current free market conditions. (3)

Market Outlook

Patient investors sighed with relief at January’s major Wall Street advance. The S&P 500 had not rallied so strongly in January since 1987. It just goes to show that when the bears come out, the bulls are quite capable of coming right back. Going into February, investors have three preoccupations: earnings, the rate of progress in the trade negotiations between the U.S. and China, and the lingering risk of a shutdown in Washington. In the best-case scenario, this month would see a return to business as usual on Wall Street: a leveling out of extreme volatility, a fading memory of December and its anxieties. With luck, maybe we will see that this month instead of a retreat inspired by poor quarterly results or sudden headlines. (4)

Monthly Financial Tip:

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Citations

1 - markets.wsj.com/us [1/31/19] 2 - nbcnews.com/business/economy/federal-reserve-leaves-interest-rate-unchanged-first-meeting-2019-n964726 [1/30/19] 3 - bloomberg.com/news/articles/2019-01-18/china-is-said-to-offer-path-to-eliminate-u-s-trade-imbalance [1/18/19] 4 - marketwatch.com/story/what-does-the-stock-markets-monster-january-rally-mean-for-february-2019-01-31 [1/31/19]

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.