Coming off the best January performance for the market in 32 years, we thought February might be a month of digesting those gains. However, during the month we saw a continuation of the solid earnings from January and continued to get encouraging news on interest rates and the China trade deal. By the end of the last full week of February the Dow Industrial average had moved higher for the first 8 weeks of the year, something not seen in 55 years, and the tech heavy NASDAQ had also moved higher for 8 consecutive weeks for the first time in history. While some are calling the dramatic move since Christmas Eve irrational, we could argue that the irrational part of the move was the December selling and January and February have simply been about unwinding that move. At the end of the month the S&P 500 had gained another 3% and is now 11.1% higher for the year.
We began the month with a government jobs report that showed, despite the government shutdown, a much better than expected 203,000 new jobs were created in January. We began the first full week of the month with strong earnings from several major companies that sent the Dow on a 2-day 340 point rally. However, late in the week the European Commission reduced their 2019 Euro growth projection to 1.3% from 2018’s 1.9%, and White House economic advisor Larry Kudlow said we are still far from a trade deal with China. Those news items sent the market lower, nearly erasing the gains for the week. At the end of the first full week of trading the S&P 500 was up just.1%. The second week turned out to be the strongest of the month. Early in the week we learned professional money managers had the highest level of cash since 2009, which is money that will ultimately be put to work in the market. On Tuesday there was an agreement to fund the government that President Trump signed. We did learn retail sales in December showed the smallest month over month gain in 9 years, but money managers seem to want to get some of their cash to work ahead of a China trade agreement that most now expect. The week ended with the S&P 500 gaining 2.5%. The last full week of the month was shortened by the President’s Day holiday and featured light trading with little market moving news. We did learn the leading economic indicators were -.1% vs an expectation of +.1%, but China trade optimism offset that news. At the end of the week the S&P 500 had gain another .6%. This week the market focused on the Trump/Kim Jung Un summit that ended without an agreement, continued trade talks with China that appear promising, and former Trump attorney Michael Cohen’s testimony before Congress. We also learned Q4 GDP was a stronger than expected 2.9% but, despite the plethora of news, the S&P 500 ended the last 4 days .3% lower.
In other parts of the country March “comes in like a lion and out like a lamb”, but with temps near 80 degrees the lion part doesn’t work in Tucson. The month is historically a very average month in terms of market returns, ending with a gain 61% of the time and an average gain of .6%. With earnings season behind us the market is likely to focus on China trade. An agreement should be well received by the market, but any sign an agreement is in trouble would be problematic for market averages. There is likely to be political noise surrounding President Trump, but thus far that has had little impact on the markets. There has clearly been a slowing of the global economy and the 4200-point Dow Industrial rally off the Christmas Eve low has brought stocks to levels that could, in relation to the economic backdrop, be considered elevated. What the market is hoping to see is a trade agreement between the U.S. and China that will reignite global growth. It appears investors are reluctant to sell ahead of an announced agreement, but a strong rally after an agreement could be a short-term top.
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