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Financial Markets Commentary, February 4, 2019 For the week of February 4, 2019

Key Market Data

01/25/2019 02/01/2019 One Week Change YTD One Year
S&P 500 Index 2,664.76 2,706.53 +1.58% +8.12% -2.18%
MSCI EAFE Index 1,813.63 1,830.04 +0.90% +6.55% -12.14%
Barclays Capital U.S. Aggregate Bond Index 2,052.40 2,063.18 +0.53% +0.81% +2.27%
10-year Treasury Note Rate 2.759% 2.685% -7.4 basis points 0.0 basis points -10.6 basis points

After a brutal December and a stumbling first two days of January, the stock market dramatically reversed course and closed out the month on a roll. It all began on Friday, Jan. 4, when Federal Reserve Chairman Jerome Powell said the Federal Reserve wasn’t on a “pre-set” path to raising its benchmark rate – and the Dow soared 746.94 points. And it continued last week when Powell went a step further, saying “the case for raising rates has weakened somewhat,” helping the major indexes close out January on a high note. How high? Well, after the worst December since 1931, the Dow jumped 7.3 percent in January, the S&P 500 8.0 percent, and the Nasdaq 9.8 percent, their best opening months, since, respectively, 1989, 1987, and 2001. In addition, it was the best single month for both the Dow and S&P 500 since October of 2015.

The Fed puts the brakes on

After raising its rate four times in 2018, the Fed had originally forecast three more hikes in 2019, raising concern among investors about the impact of higher interest rates on the economy, and also provoking the ire of President Trump. Last week, the Fed made it clear that hikes were on hold because of a range of rising threats to the American economy, including slowdowns in China and Europe, the Brexit, and conflicts over trade and tariffs. At his post-meeting press conference Powell said, “these risks were going to be with us for a while,” but as the U.S economy was “solid” the Federal Reserve had “the luxury of patience” when it came to raising its rate.

Jobs and manufacturing

On Friday, two days after Powell expressed concerns about a slowdown, there was evidence that the American economy is, for now, more than resilient. First, the Labor Department said that 304,000 jobs had been added in January, well above the forecast of 165,000, even after including the downward revision of 70,000 jobs for November and December. It was also a milestone because it was the 100th month in a row of job expansion. The jobless rate ticked up from 3.9 percent to 4 percent because of the shutdown, but the labor force participation rate rose to 63.2 percent, a five-year high and a sign that Americans are moving off the sidelines and back into the labor force. Wages increased a solid 3.2 percent for the year. Later on Friday, the Institute for Supply Management said its manufacturing index, which had declined to 54.3 in December, bounced back to 56.6 in January.

The shutdown

Democrats and Republicans have set to work trying to reach a compromise on border security by Feb. 15 – and avoid another shutdown – and the congressmen working on the deal are mostly seen as dealmakers, not hardliners. Even so, President Trump cast doubt on the process last week, saying it was “a waste of time,” and pledging to find a way to build the wall anyway, possibly by declaring a national emergency. Trump is expected to make his case Tuesday night in his State of the Union speech. In the meantime, the Congressional Budget Office said the shutdown cost the economy an estimated $11 billion that would lower first-quarter GDP by 0.4 percentage points, though all but $3 billion would ultimately be recouped.

Trade talks with China

China’s leading negotiator Vice Chairman Liu He met in Washington last week with Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer. Though there was no breakthrough, progress was “substantial” according to Lighthizer, and included an offer from China to buy more soybeans. Trump said he may meet face to face with China’s President Xi Jinping later this month at a yet undisclosed location, perhaps Vietnam; the tariffs on China are still set to increase on Mar. 2. The president told The New York Times that he was optimistic about a deal but would probably keep some tariffs in place, saying, “Without the tariffs, we wouldn’t be talking.” The administration kept up its pressure on China’s telecom giant Huawei last week, indicting it for stealing trade secrets and evading sanctions on Iran, while also moving to extradite its CFO Meng Wanzhou, from Canada.

The Brexit and the Eurozone

Great Britain’s Prime Minister Theresa May survived one vote last week that would have all but removed her from the Brexit process by mandating that Britain stay in the European Union past Mar. 29 even if an agreement wasn’t reached, thus avoiding a “no deal” exit. May wants to renegotiate the exit plan she worked out with the EU though she admitted there was “limited appetite” on the EU’s part to revisit the deal. Meanwhile, the Eurozone’s growth slowed in the last quarter of 2018 to 0.2 percent, its slowest pace since 2014. And with its growth having contracted 0.2 percent in the last quarter, Italy fell into recession for the third time in the last decade (a recession is defined as two consecutive quarters of contraction), a downturn that will be complicated by the populist Italian government’s fractious relationship with the EU.

In other news, with more than half of the S&P 500 companies having reported, 70 percent have announced better-than-expected earnings and FactSet estimates that earnings will be up 12 percent from a year earlier. The S&P CoreLogic Case-Shiller home price index fell to 4.7 percent from a year earlier in November compared to 5.0 percent in October. New home sales climbed 16.9 percent in November but were off 7.7 percent from a year earlier. The National Association of Realtors said that pending home sales declined 2.2 percent in December from November and were down 9.8 percent from December of 2017. The Conference Board’s consumer confidence index dipped to 120.2 in January, its lowest level since mid-2017, from December’s 126.6, First-time jobless claims jumped 53,000 for the week ending Jan. 27 to 253,000, the highest total since September of 2017, though much of the surge was attributed to the shutdown and the teachers’ strike in California. The week before, claims had dropped to their lowest level since 1969. The four-week moving average was up 5,000 to 220,250.

A look ahead

As the government continues to catch up with reports delayed during the shutdown, this week’s releases will include the latest on factory orders, personal consumption expenditures, fourth quarter GDP, retail sales, building permits and housing starts, the ISM’s nonmanufacturing index, the trade balance, nonfarm productivity, and consumer credit.