Love is in the Air

Love is in the air.  Stocks surged once again on Friday as new hopes (there is that word again) were ignited by the President and  Jerome Powell.  On the 35th day of the longest government shutdown in history, investors were still largely ignoring shutdown risks as equities posted a positive week for the fifth week in a row.  The President announced that he would temporarily halt the shutdown and the market largely shrugged off the news. Let’s go over the key factors driving the recent surge again: 1) The Federal Reserve has, though they tightened in December, sent a clear signal that further rate hikes would be on hold… for now… 2) both the US and China seem like they are ready to bring the trade war to an end and China has actually made some symbolic moves in commodity purchases 3) stocks were oversold and cheap… relative to where they had been 4) a new year meant that it was time for portfolio managers to get back to business and start loading up, and finally 5) although it is early, earnings seem to be doing OK.  But how much more can the market make of these factors?  Let’s take a look back for a minute.  2015 wasn’t a great year for stocks, the Fed was officially starting to normalize, which meant selling assets and raising rates, crude oil hit lows that were unthinkable, and many believed that the bull run was over.  The negativity carried in 2016 and volatility and downside risk was high for the first three quarters, really until November… the elections.  Trump won the presidential elections and hopes for a new era of deregulation and tax cuts launched equity markets into hyperdrive.  Trump along with the Republican Congress began to make good on his promises by enacting a tax overhaul which was a windfall for corporations and a small but respectable bonus for average tax payers.  The administration also began to dismantle regulations easing financial burdens of many regulated industries.  The result was corporate confidence which led to a surge in hiring bringing the unemployment rate to lows not seen since I was 2 years old (that was some time in the 60’s… the late 60’s).  Less corporate taxes meant greater corporate earnings, which is always a good thing… for corporations and investors.  Stock markets seemed to hit new highs almost weekly throughout 2017.  Then came that other election promise, fixing the trade imbalance with our trade partners.  The trade war began in January of 2018 just as the market finished off 2017 with a strong rally.  Markets traded mostly sideways through June and many analysts began to believe that the party was over, but then the market rose once again making yet another all time high.  On the surface, it looked like happy days were here again, but cracks started showing up in the foundations.  An aggressive Fed was determined to normalize rates and the trade war with China was beginning to look like it would never end.  The result was the 4th quarter swoon that brings us to where we are today. Chinese delegates will be in the US starting today and there appears to be an end in sight for the trade war and the market has already factored in a success.  The Fed remains “patient” (their own words) and they continue to signal their newly accommodative stance.  On Friday, Jay Powell upped his bet by hinting that the balance sheet normalization might end earlier than expected.  What that means is that they will stop selling the treasuries and agency mortgage back securities that they bought as part of the quantitative easing.  That would be an easing of pressure on the economy and it would certainly represent a change in policy.  The report that detailed Powell’s shift helped push the markets up in Friday’s session.  Later this week the FOMC will meet to discuss policy and they are largely expected to keep rates unchanged, however their policy statement along with the Chairman’s press release will be the news of the day.  Powell will now hold a press conference after every FOMC meeting. The Fed will surely be assessing and discussing further the global economic slowdown, risks from the trade war, and the effects of the government shutdown.

The upcoming week will be a wild roller coaster of economic releases which not only include the monthly employment situation, GDP with its PCE deflators, and consumer confidence, but also all the data that was delayed from last week due to the shutdown.  Investors will be particularly sensitive to a lot of these numbers as they may reflect some of the shutdown’s effects.  In particular, investors will look at consumer confidence and employment.  The week ahead will also feature earnings releases from 114 of the S&P 500 members.  We will hear from GE, Apple, Microsoft, Facebook, Tesla, and Amazon amongst many others.  Please refer to the attached weekly earnings and economic release calendars for specifics.

daily chartbook 2019-01-28

earnings releases 1_28

econ numberd 1_28