/perspectives/weekly-viewpoint/patient-and-flexible

“Patient and Flexible”

The major market indices continued to rebound from the December lows on growing hope of a resolution in the U.S.-China trade dispute and assurances from the Federal Reserve that it would be patient on interest rate hikes.

January 14, 2019    |    By Mike Schwager

Performance for Week Ending 1/11/2019:

The Dow Jones Industrial Average (Dow) added 2.40%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 2.96%, the Standard & Poor’s 500 Index (S&P 500) rose 2.54% and the Nasdaq Composite Index (NASDAQ) tacked on 3.45%. Sector breadth was positive with all 11 of the S&P sector groups finishing the week higher. The Industrials sector (+4.09%) was the best performer followed by Real Estate (+3.97%) and Consumer Discretionary (+3.73%).

Index* Closing Price 1/11/2019 Percentage Change for Week Ending 1/11/2019 Year-to-Date Percentage Change Through 1/11/2019
Dow 23995.95 +2.40% +2.87%
Wilshire 5000 26853.83 +2.96% +4.29%
S&P 500 2596.26 +2.54% +3.57%
NASDAQ 6971.48 +3.45% +5.07%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 1/7/2019 – 1/11/2019

The major market indices continued to rebound from the December lows on growing hope of a resolution in the U.S.-China trade dispute and assurances from the Federal Reserve that it would be patient on interest rate hikes.

A Near-term Pause? Last week, Fed Chairman Powell speaking at the Economic Club of Washington, said the U.S. central bank can be “patient” before adjusting interest rates again as it waits to see how global risks impact the domestic economy. “We’re in a place where we can be patient and flexible and wait and see what does evolve,” Powell said during the question-and- answer session. Similarly, other officials indicated a more dovish path for rates with Atlanta Fed President Bostic noting that he now only sees 1 hike in 2019 and Chicago Fed President Evans stating that the Fed could "easily wait 6 months" before thinking about raising rates. The favorable reaction by the market last week seems to suggest that investors now see the Fed on hold for the foreseeable future.

Trade: On the trade front, U.S. officials had their first face-to-face meeting of the year in Beijing in a round of talks aimed at advancing the framework set out by Trump and China's President Xi Jinping last month in Argentina. In a surprise move, Chinese Vice Premier Liu He unexpectedly attended the first day of talks. Liu is the top economic adviser to Chinese President Xi Jinping, who led previous negotiations in Washington that produced a deal that President Donald Trump then repudiated. Liu’s participation in the meeting was viewed as a signal that China is attaching high importance to the talks. What was supposed to be just a two-day meeting extended to a third day, showing both sides were "serious," according to China's Foreign Ministry.

First Five-Day Rule: Stocks ended the first five trading days of the year higher, signaling that 2019 should be positive for the market. When stocks bounce at the beginning of the year, history shows the market is more often up than down at year-end. According to the Stock Trader’s Almanac, in 44 instances since 1950 when the first five days were positive, the S&P 500 ended the year higher 36 times (82%), with an average gain of more than 13 percent.

Earnings Season: Fourth quarter earnings season will begin to ramp up during the coming week with 34 members of the S&P 500 scheduled to release results. According to Bloomberg, S&P 500 earnings for Q4 are forecast to rise by 11.9%, however expectations are relatively low following the recent warnings from Apple, FedEx, and Delta Airlines. A quick look at the “early reporters” shows that of the 21 members of the S&P who have already released Q4 results 85% have surprised to the upside with an aggregate beat rate of 3.1%. While it is too early to draw any firm conclusions, aggregate earnings growth is running at nearly 16%, suggesting the bar may have been set too low – stay tuned.

Outlook: Despite the sharp draw down in the market late last year and the increase in market volatility, we still have a bullish tilt and continue to believe there is money to be made over the coming quarters. The markets have been trading like a recession is right around the corner – and this clearly is not the case.

After posting a new record high in late September, the S&P 500 hit a rough patch shortly thereafter, prompted by an environment of rising uncertainty. At the time, Fed Chairman Powell sounded very ‘hawkish’ by stating “we are a long way from Neutral,” 10-year yields jumped to the highest level in seven years, there was growing speculation that oil was on its way to $100 per barrel, trade tensions between the US and China were skyrocketing, Italy was facing a budget crisis, and concerns over the market’s valuation were front and center.

As we enter into the new year, many of these concerns have diminished: The Fed has pivoted to a more ‘dovish’ tone (the December “dot-plot” is now signaling two rate hikes over the course of 2019 instead of three while Fed Chair Powell now thinks “we are close to the neutral rate” and the Fed can afford to be “patient” and “flexible”), the 10-year yield has plunged by over 50 basis points, oil has reversed course and is down by approximately 30% from the recent highs, US/China trade tensions have reached a temporary cease fire, Italy has agreed to a budget deal, and valuations have plummeted. The latter suggests that a lot of bad news has already been factored in to equity prices.

The Week Ahead: On the data front, reports of interest include; the December producer price index (PPI) report, the January Empire State Manufacturing Survey, the January housing market index. the January Philly Fed outlook survey, December industrial production and the University of Michigan’s January consumer sentiment survey. On Wednesday, the Federal Reserve’s periodic Beige Book report will be released. It will be another busy week for Fed Heads with seven speeches scheduled throughout the week.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.




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