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Market Commentary, January 14, 2019 For the week of January 14, 2019

Key Market Data

01/04/2019 01/11/2019 One Week Change YTD One Year
S&P 500 Index 2,531.94 2,596.26 +2.54% +3.63% -4.35%
MSCI EAFE Index 1,736.69 1,786.13 +2.85% +3.92% -12.59%
Barclays Capital U.S. Aggregate Bond Index 2,050.97 2,050.23 -0.04% +0.18% +0.66%
10-year Treasury Note Rate 2.669% 2.702% +3.3 basis points +1.7 basis points +16.4 basis points

Whatever toll the federal shutdown may be taking on America, it has yet to have an impact on the stock market. In fact, over the last three weeks, the market has roared back from a weak fourth quarter and slow start to the new year. All of the major indexes were up more than 2 percent last week, and the Dow has now put together its best three-week run since right after President Trump was elected in 2016. The upswing is the result of what looks like progress in the trade talks with China and ongoing reassurances from the Federal Reserve that it will be circumspect about raising its benchmark rate this year, not to mention the blockbuster jobs report for December released the week before last.

The shutdown

At 12:01 a.m. on Saturday, the current shutdown became the longest in U.S. history, eclipsing the previous record of twenty-one days set in late 1995 and early 1996 when Bill Clinton was president. And, as of today, this one shows no sign of ending any time soon, as the House, now in the hands of the Democrats, is unwilling to give the president the $5.7 billion he wants for a border wall with Mexico. The only point the two sides have been able to agree on is that federal employees will get back pay once the shutdown ends, and the Internal Revenue Service has also said that the shutdown will not affect tax refunds.

Trade talk progress

An American delegation traveled to China last week to discuss trade, and while there were no breakthroughs, both sides seemed upbeat both the progress made, with Trump tweeting, “Talks in China are going very well!” The meeting lasted one more day than scheduled and, more importantly, China’s Vice Premier Liu He is scheduled to come to Washington to meet with the U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Jan. 30 and 31, though that meeting could be delayed by the shutdown.

The Fed makes its case

In what seemed to be a choreographed campaign, the Fed’s Chairman Jerome Powell, Vice Chairman Richard Clarida, and a handful of regional bank presidents all reassured investors last week that the Fed was not going to raise its benchmark rate precipitously. For instance, Powell, after noting that “2018 was a very good year,” added that, because inflation was tame, “We have the ability to be patient and watch patiently and carefully as we watch the economy evolve.” Clarida, added, “I believe patience is a virtue and one we can today afford.” Charles Evans, the President of Chicago’s Federal Reserve Bank, chimed in, “We have good capacity to wait,” and his counterpart in Atlanta, Raphael Bostic, said there would be a “relatively limited amount” of hikes in the future. The CME Group now estimates that there’s a 21 percent chance of a rate hike before the end of June, down from 45 percent last month.

Oil on a roll

The price of oil has soared in the new year with U.S. crude having entered a bull market last week, up 20 percent from a recent low. The rise is partly due to the fact that, on Jan.1, the agreement by members of the Organization of Petroleum Exporting Countries (OPEC) and Russia to cut production by 1.2 million barrels a day took effect. In addition, Saudi Arabia said that it plans to further lower its output later this month with the goal of pushing crude to $80 a barrel; on Friday, U.S. crude closed at $51.59 a barrel and Brent finished at $60.48.

The Brexit vote; the eurozone’s jobless rate

On Tuesday, Parliament is expected to vote, and reject, Prime Minister Theresa May’s Brexit plan. With Great Britain scheduled to leave the European Union on Mar. 29, the two sides have yet to reach an agreement about the terms of the divorce and talk of a second referendum has resurfaced. On Sunday, Ms. May warned that failing to pass her plan “would be a catastrophic and unforgivable breach of trust in our democracy.” There was some good news for the EU last week when Eurostat said that the eurozone’s jobless rate fell to 7.9 percent in December, its lowest level since 2008.

#1, for now

Amazon passed Microsoft last week to become the biggest company in the world as measured by market value, coming in at $802 billion, well down from the $1 trillion plateau that both Apple and Amazon briefly hit last year. Alphabet is now number three in market value, followed by Apple, whose stock recently tumbled after the company forecast an earnings slowdown.

Inflation remains “low and under control”

Last week Powell said that inflation was “low and under control,” and the latest release on consumer spending backed him up. The consumer price index was off 0.1 percent in December from the month before, mainly because the price of gas fell 7.5 percent; core prices, excluding food and energy, were up 0.2 percent. Over the past year, prices were up 1.9 percent, while core prices increased 2.2 percent. The government said real average hourly earnings improved 1.1 percent in December from a year earlier, the best reading since September of 2016. In other news, the Institute for Supply Management (ISM) reported that its nonmanufacturing index fell from November’s 60.7 to 57.6 in December. The index of small business optimism was 104.4 in December compared to 104.8 in November. The government said there were 6.89 million job openings as of Nov. 30, down from a revised 7.13 at the end of October and the all-time record of 7.29 million in August. And first-time jobless claims for the week ending Jan.5 fell 17,000 to 216,000; the four-week moving average rose 2,500 to 221,750.

A look ahead

Once again, some economic updates may not be released this week because of the government shutdown. The week’s scheduled reports include the latest on retail inventories, new home sales, construction spending, the trade balance, the producer price index, the Fed’s Beige Book, housing starts, building permits, industrial production, and consumer confidence. The fourth-quarter earnings season will also begin in earnest, with FactSet estimating that revenues will be up 10.6 percent from a year earlier.