January Market Commentary
Stock markets surged into the new year, as the Standard & Poor’s 500 (S&P 500) rallied significantly in January after a meaningful sell-off in December. As we reviewed in our Fourth Quarter Market Commentary, Federal Reserve Chairman Jerome Powell’s hawkish comments about continuing to raise interest rates were a contributing factor to the stock market correction late in 2018. As we suggested in our commentary, this set the stage for a recovery and a potentially good year in 2019. In early January remarks about monetary policy, Mr. Powell commented the case for higher interest rates “has weakened” due to muted inflation and slowing U.S. growth. He suggested the Fed will be patient before deciding its next move. Markets reacted positively to these dovish comments by the Fed. It is important not to understate the importance of the Federal Reserve’s communication strategy. If they are perceived to be too aggressive in increasing interest rates, investors become concerned they will lead us into a recession. Therefore, the Fed’s actions to slow the pace of interest rate hikes reduces the chance of it causing the next recession anytime soon. As corporate America reports December quarter financial results, the U.S. economy remains healthy overall. While the benefit of lower corporate taxes fades in 2019, a strong labor market, low unemployment, benign inflation and the re-opening of the government are factors contributing to solid growth expectations for the U.S economy. One of the biggest challenges for investors to face in 2019 is U.S. corporate profit growth will slow, but we expect it to remain positive for the year. This does not imply bad markets ahead though. It suggests volatility, both up and down, will likely persist for the year. As long-term investors, this does not change our focus on structuring well-diversified portfolios to provide attractive risk-adjusted returns. It is important not to get caught up in the distractions by the media about what the market will do today or next week. Rather, staying disciplined with your long-term asset allocation and maintaining diversification are keys to helping you achieve your long-term goals.
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The fourth quarter was dramatic in the financial markets, with a notable increase in stock market volatility. Interest rates rose throughout the year, then fell during the quarter; oil prices plunged to close the year at about $45.00 per barrel. Federal Reserve Chairman Jerome Powell made hawkish comments about continuing to raise interest rates for another year or two, seeming to be out of touch with market expectations. The year finished with continued worries about a global economic slowdown and economic conflict with China.
2018 will go into the books as a year in which nothing worked very well. Domestic stocks were down, bonds were flat, and international stocks were even weaker. However, we remain optimistic about the market going forward, as economic numbers continue to be very good. The fundamentals of the U.S economy and earnings have been healthy. The broadest measure of the economy, the gross domestic product (GDP), had a growth rate of 4.2% for the second quarter and 3.5% in the third quarter. The fourth quarter is widely expected to be about 2.5%, meaning that the full year should be about 3%. Job creation has been strong, and the unemployment rate has fallen to 3.7%, its lowest level in decades. Weekly unemployment claims have hit 50-year lows. Retail sales were very strong during the holiday shopping season as the result of a surge in consumer confidence.
Corporate earnings growth was very strong in 2018 with the second and third quarters showing year-over-year gains well in excess of 20%. Tax law changes helped drive these gains, as well as the elimination of many job-killing regulations. The sharp sell-off in the fourth quarter may set the stage for recovery and a potentially good year in 2019. The outlook for the economy continues to be positive, and we believe it is unlikely that we will dip into a recession in the year ahead.