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Financial Markets Commentary For the week of January 28, 2019

Key Market Data

01/18/2019 01/25/2019 One Week Change YTD One Year
S&P 500 Index 2,670.71 2,664.76 -0.22% +6.41% -4.28%
MSCI EAFE Index 1,805.10 1,813.63 +0.47% +5.55% -14.22%
Barclays Capital U.S. Aggregate Bond Index 2,046.35 2,052.40 +0.30% +0.28% +1.05%
10-year Treasury Note Rate 2.785% 2.759% -2.6 basis points +7.4 basis points +14.1 basis points

Stocks got off to a slow start last week, partly because of the news about China’s GDP increasing only 6.6 percent in 2018, its worst year-over-year showing since 1990, and what that might mean for the global economy. However, the major indexes worked their way back into the black as the week advanced, mainly because of positive fourth-quarter earnings news from companies such as P&G, Comcast, IBM, and Starbucks, and by Friday both the Dow and Nasdaq had extended their winning streak to five weeks, though the S&P 500 slid 0.2 percent. The week ended with the news that the federal government would reopen, but the market reaction was largely muted; in fact, the shutdown did not seem to take much of a toll on stocks at any point, with the S&P 500 up more than 10 percent over the course of its 35 days.

The shutdown

The longest-ever shutdown of the federal government affected everything from economic releases to airport travel, from national parks to IPOs. On Friday President Trump announced that the two sides had agreed to a temporary truce, reopening the government until Feb. 15 as negotiations continue. The impetus for the deal was partly the result of the failure in the Senate of proposals to reopen the government from both the GOP and the Democrats, neither of which garnered the 60 votes needed for passage, and perhaps the fact that six Republican senators endorsed the Democrats’ proposal while only one Democrat voted for the GOP’s plan. The day after announcing that the government had reopened, the president tweeted, “We will build the Wall!” but also noted that both sides were “very dug in.” One other effect of the shutdown is that members of Congress on both sides of the aisle are looking into passing legislation that would ban shutdowns and, should there be such an impasse, keep the federal government open at the same spending levels until an agreement is reached.

China

In addition to concerns about a possible slowdown in China, the market dipped early last week on the news that the United States had rejected China’s request for a pre-summit planning session. Larry Kudlow, the Director of the National Economic Council, dismissed the report but emphasized that the high-level meeting scheduled for later this month is “very, very important,” further describing it as “determinative.” Commerce Secretary Wilbur Ross gave a less-than-optimistic progress report on the trade talks, saying that the U.S. and China were still “miles and miles from getting a resolution.” On Mar.2, unless a deal is worked out, the current rate of tariffs on $200 billion of Chinese goods will be raised from 10 percent to 25 percent.

The IMF’s forecast

Partly in response to China’s slowdown, but also because of such issues as tariffs, the Brexit, and lower oil prices, the International Monetary Fund (IMF) has cut its forecast for global growth in 2019 to 3.5 percent from 3.7 percent in October and 3.9 percent last July. The IMF’s Managing Director Christine Lagarde, speaking in Switzerland last Monday, said that she was not expecting a recession in the near-term, but noted that “the risk of a sharper decline in global growth has certainly increased.” Later in the week, Mario Draghi, the President of the European Central Bank, said that the economic outlook in the Eurozone has worsened lately because of “the persistence of uncertainties,” but added, “We have lots of instruments and we stand ready to adjust them or use them.”

The Fed’s portfolio

The market was also given a boost on Friday after The Wall Street Journal reported that the Federal Reserve may slow the unwinding of its multi-trillion-dollar portfolio of mortgage and Treasury securities that began in 2017. After the financial crisis of 2008, the Fed began purchasing securities to boost growth, with its balance sheet peaking at $4.5 trillion; it’s now at $4.05 trillion. Though President Trump has linked the unwinding to stock market volatility, the Fed is reportedly contemplating slowing down not because of concern about the economy, but because of an internal debate about how the portfolio impacts the U.S. banking system. The Fed will meet this week and its Chairman Jerome Powell and will likely be asked about the status of the portfolio at his post-meeting press conference.

The Brexit

A week after her Brexit plan was roundly rejected by Parliament, Britain’s Prime Minister Theresa May offered her “Plan B,” but it was dismissed by Jeremy Corbyn, the head of the Labour Party and her chief adversary in Parliament, as “a bit like Groundhog Day.” The main difference seemed to be that she was willing to accept amendments to her plan from Parliament. With the deadline for the Mar. 29 exit from the European Union looming, even Queen Elizabeth weighed in on the Brexit last week, if indirectly, as no one agreed as to exactly what she said – the Queen is constitutionally prohibited from weighing in on political issues.

In other news, the National Association of Realtors said that existing home sales fell 6.4 percent in December to 4.99 million and were off 10.3 percent from December of 2017. In addition, prices were up 2.9 percent from a year earlier, the smallest year over year gain since February of 2012. For all of 2018, sales fell 3.1 percent to 5.34 million. The Conference Board’s index of leading economic indicators was off 0.1 percent in December to 111.7. And first-time jobless claims for the week ending January 19th fell 13,000 to 199,000, the lowest total since 1969. The four-week moving average dipped 5,500 to 215,000.

A look ahead

With the shutdown over, for now, the government will get back to issuing economic releases this week. The very long list will include releases that were postponed over the last month, as well as the latest on the CoreLogic S&P Case-Shiller home price index, pending home sales, fourth-quarter GDP, consumer and construction spending, the Institute for Supply Management’s manufacturing index, and the jobless report for January, forecast to remain unchanged at 3.9 percent. In addition, the Fed will meet on Tuesday and Wednesday, and the fourth-quarter earnings season will continue, with Amazon, Apple, and Facebook issuing reports this week.