As January Goes, So Goes the Year?

Performance for Week Ending 2/1/2019:

The Dow Jones Industrial Average (Dow) added 1.32%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) gained 1.61%, the Standard & Poor’s 500 Index (S&P 500) rose by 1.57% and the Nasdaq Composite Index (NASDAQ) tacked on 1.38%. Sector breadth was positive with 10 of the 11 S&P sector groups finishing the week higher. The Energy sector (+3.17%) was the best performer followed by Consumer Staples (+2.94%) and Real Estate (+2.88%).

*See below for Index Definitions

MARKET OBSERVATIONS: 1/28/2019 – 2/1/2019

The major market indices finished the week solidly higher reflecting the ‘dovish’ pivot by the Federal Reserve, the better than feared Q4 earnings season, and growing anticipation a trade deal with China will be reached. The Dow and Nasdaq have now posted gains for six consecutive weeks while the S&P 500 is up in five of the last six.

As January Goes, So Goes the Year? According to the Stock Trader's Almanac, since 1950, January performance has predicted the markets full year direction 87% of the time. This year the S&P 500 gained 7.9%, marking the best January performance since 1987, when it rose 13.2% percent. While more often right than wrong, the indicator did signal a positive year for 2018. However, after suffering a late-year sell off, the S&P 500 finished off 6.6%.

Payroll Report: The Labor Department reported that January non-farm payrolls jumped by 304K, well ahead of the 165K additions expected by economists. The gain in January payrolls marked the 100th consecutive month that the US economy has added jobs. The stronger than expected growth underscores that the economy remains on firm footing and should continue to underpin growth in household spending, which comprises the bulk of domestic economic growth.

FOMC Meeting: The FOMC reiterated last week that it would be "patient" in hiking interest rates, reinforcing expectations that they are almost done with their rate hiking campaign. At the conclusion of the meeting, the Fed’s benchmark interest rate was held steady at a range of 2.25-2.50%. The committee also released updated guidance around how it is shrinking its $4 trillion balance sheet by indicating officials had agreed to technical changes that should result in a larger balance sheet. According to the statement, the committee "is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.” The dovish tone was well received by the market and essentially takes the Fed out of the picture for the foreseeable future.

Q4 Earnings Roundup: With just about half of the members of the S&P 500 already releasing fourth quarter results, earnings season continues to track a modestly better than expected pace. Through Friday, 235 members of the S&P 500 have released results with just over 73% surprising to the upside. Aggregate earnings growth is running at 14.7%, moderately above the 12.45% expected growth when all is said and done. While the pace of growth has moderated from recent quarters, it still remains positive and certainly better than feared heading into the quarter.

Outlook: We maintain a bullish tilt towards the market and continue to believe there is money to be made over the coming quarters. However, after the scorching start to the New Year, a period of consolidation would not be surprising. Our view is that as long as the economy and earnings continue to grow – which remains our base-case scenario—equity prices should ultimately follow suit. Valuations have contracted following last year’s drawdown, and with stabilizing interest rates and inflation, a moderate expansion in the market’s price to earnings multiple seems likely.

The Week Ahead: Fourth quarter earnings season will remain front and center in the coming week with 95 members of the S&P 500 index scheduled to release results. The data calendar is relatively light this week. Reports of interest include; November factory orders, the January Institute for Supply Management (ISM) non-manufacturing index, initial jobless claims, and fourth quarter productivity. The Fed speaking calendar will pick up this week following the recent blackout period, with five Fed Heads scheduled to speak, including Fed Chairman Powell on Wednesday. Also of interest, will be President Trump's delayed State of the Union address on Tuesday evening.