Capital Markets Review: January 2019
Global stocks ignored a lengthy government shutdown and bounced back from a dour December. Declines in the fourth quarter of 2018 were largely attributed to three things; trade conflict with China, rising interest rates, and shaky earnings. January showed important progress on all three items, and the market rallied accordingly.
US-China trade talks seem to be progressing in a positive direction, though no breakthroughs have been announced. While the Chinese stock market was under duress for most of 2018, losses in the US in Q4 created incentive for both sides to avoid further damage to economic growth. We’re cautiously optimistic more cooperation can be found, but expect trade tensions with China to persist for years.
The Fed & Interest Rate Environment
The Fed kept rates on hold in January and signaled increased “patience” around further hikes. The central bank also indicated it is open to flexibility in the approach to reducing its balance sheet. This convinced investors that Chairman Powell will be reactive to data and is not dead-set on tightening. Interest rates fell as a result, once again confounding those convinced we are in a rising rate environment.
Earnings season saw hits and misses, but on balance has been better than some feared. With about half of the S&P 500 having reported as of the end of January, earnings growth is trending toward 12%, helping make forward looking valuations compelling.
Summing it up, it is not hard to see why stocks posted their best January in over 30 years. Still, the gains represented a snap-back from hurried selling in December rather than new highs, and issues on trade and overall growth in China remain outstanding. It is natural to equate volatility with losses, but technically big up months are also volatile, just in a more pleasant fashion. We’re likely to continue to see sizable moves in both directions ahead.