After one of the best Januarys in the past three decades, stocks were able to build on to those impressive gains.  As a matter of fact, the Dow Jones Industrial Average has produced nine consecutive weeks of gains to begin the year.  This streak last happened 24 years ago.  The bond market found a period of calm as interest rates and credit spreads were quite stable throughout the month.  February had just enough good news to keep the markets moving upward.

• The January labor report showed the economy created 304,000 new jobs, crushing expectations. The temporary government shutdown had little impact on the employment numbers.
• Reported corporate earnings have shown modest growth in the fourth quarter, with 67% exceeding EPS expectations and 62% topping revenue estimates. (This is with 84% of the S&P 500 reporting). Earnings estimates for the first quarter have been steadily coming down, but 2019 as a whole is expected to show 4.8% annual growth.
• Government shutdown 2.0 was adverted and the markets gladly put this worry in the rear view mirror.
• Trade tensions with China has had the market’s attention for a while. The self-imposed March 1 deadline for additional tariffs hung like a dark cloud until hints of a deal calmed fears. A late month tweet from President Trump, stated the deadline will be pushed forward as progress is being made on a trade deal.
• Retail sales and home sales disappointed retail sales by declining an unexpected 1.2% in December, the worst decline in nine years. Existing home sales were down 8.5% year over year, their worst report since November, 2015.

Despite some mixed economic news, stocks kept rolling as the Dow Jones Industrial Average, NASDAQ Composite and the S&P 500 gained 4.0%, 3.6%, and 3.2%, respectively, in February.  International stocks appear cheaper than their U.S. counterparts based on valuations, but their economies are not expected to grow as strongly.  International stocks still managed gains for the month as the MSCI EFAE and emerging markets indices rose 2.6% and 0.2%.  International stocks, commodities and oil are the only major asset classes showing negative returns over the past 12 months.

The Federal Reserve is now clearly on hold until the second half of 2019.  Interest rates and the shape of the yield curve should be relatively stable unless there are significant changes to economic growth forecasts or inflation.  The entire U.S. Treasury yield curve traded in a very tight range during February. The 2, 5, 10 and 30-year U.S. Treasury benchmark securities closed the month yielding 2.52%, 2.52%, 2.73 and 3.09%, respectively.  From January month-end, yields rose 7 to 10 basis points. The yield curve retained its relatively flat, but still upward sloping shape.  The positive slope is good news for stocks and the overall economy as inverted yield curves have accurately predicted the last seven recessions.

Over the next several months, expect volatility to remain at current subdued levels as the markets digest economic news, future corporate earnings guidance, and any changes on the geopolitical front. With a second government shutdown averted, China trade headlines will take center stage.  We remain constructive on the financial markets in 2019.

Our optimism comes from a variety of factors:

– The Federal Reserve has stepped out of the way allowing interest rates to remain stable and economic growth likely to continue.

– The U.S. economy (GDP) can continue to produce 2.0-2.5% growth.

– The threat of a near-term second U.S. government shutdown has been avoided.

– A resolution to the China trade dispute could be a bullish catalyst, whereas non-resolution is just more of the same and a postponement of an eventual solution.

– This year began with low asset prices and valuations, allowing room for upside potential.

There will be some bumps in the 2019 road, but do not let those bumps throw you off your financial course.  One or two 10% stock market corrections during a given year is quite normal and we will likely see this happen sometime this year.  Remind yourself to be patient and maintain a long-term focus.  A three to five year time horizon is much more effective than daily, weekly or monthly portfolio checkpoints.  Stay your course with confidence in your financial plan.

MARKETS BY THE NUMBERS:

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

CNBC’s “Closing Bell” team discusses Friday’s biggest market movers with Satya Pradhuman, CEO of Cirrus Research, and Mariann Montagne, portfolio manager at Gradient Investments, and Rick Santelli at the CME in Chicago.

The stock market has had an extremely strong rally in 2019. In fact, neither the Dow Jones nor the NASDAQ has had a weekly decline this year. Take this with a grain of salt though as the gains are coming off one of the worst Decembers ever in 2018. Look at the 1 year chart below of the S&P 500 which illustrates the late 2018 correction and the 2019 rally:

Most of the issues that concerned investors in the correction, now seem to have reversed and are encouraging investors in 2019. These are:

• Trade concerns over additional tariffs with China. President Trump said recent meetings between the US and China seem to be showing “substantial progress” towards reaching a resolution.
• The Federal Reserve Bank has reversed course. From being aggressive about interest rate hikes back in October, the Fed now says it will be patient with its monetary policy (meaning it will most likely pause interest rate increases and balance sheet reductions)
• Following the December-January shutdown, Congress passed a funding resolution to avoid another
• Fourth quarter corporate earnings and 2019 guidance have been better than feared
• Most US economic reports have remained strong (particularly job growth)

The above items have helped the S&P 500 rally almost 20% from its December lows. The problem is most stocks are in a short-term technically overbought situation. See the chart below highlighting how quickly the S&P 500 has gone from being extremely oversold to overbought:

In addition, the following chart illustrates that 73.6% of the individual stocks in the S&P 500 are overbought (red line) and only 3.4% (green line) are oversold:

So back to the question of where do we go from here? It wouldn’t surprise me to see the market pause (or pull back slightly) as it digests the recent gains. But this does not mean that we’d recommend selling stocks. In fact we are still quite constructive on the outlook for 2019, and feel the market could approach its old highs. In our opinion the US economy, earnings growth, fed policy and stock price valuations are still tailwinds.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.