The December 9.2% meltdown, the worst December in nearly 100 years, was ignited by concerns about rising interest rates and China trade throwing the global economy into recession. We would expect some rebound after such a dramatic decline, but January turned out to be the best month for stocks since October 2011. During the month we saw interest rates continue to decline as the Federal Reserve backed away from their aggressive rate increase program and trade negotiations with China seem to be suggesting a deal with China is not only possible, but likely. If we are not at risk of going into a global recession in the near future, the selling in December needed to be reversed. During the month we also saw about 50% of the companies in the S&P 500 report quarterly earnings and the results were generally better than lowered expectations. At month end the Dow and NASDAQ had traded higher every week this month and the S&P 500 had gained 7.9%, its best January performance in 32 years!
The month began with market leader Apple lowering their revenue guidance, which sent those widely owned shares down 10%, its biggest one-day loss in 6 years. Apple is a component in several of the major indices, so the overall market closed sharply lower in sympathy. On the 4th we learned that a better than expected 312,000 new jobs were created in December but, more importantly, the Federal Reserve changed their approach and said they will go slow with interest rate increases and will actually watch the economy. That is an important change in policy that sent the market sharply higher. At the end of the first 3 days of trading the S&P 500 was up .9%. The first full week of the month saw increasing optimism about China trade push the market higher early in the week, before some selling on concern about the government shutdown at week’s end. The S&P 500 closed the week with a 2.5% gain. The second full week of the month was the best of the month with the market moving higher 4 of the 5 days. We continued to hear optimistic comments about a China trade agreement and we started to see the first quarterly earnings reports. On Tuesday the Brexit vote in England, something that would have sent the market sharply lower in December, was shrugged off in favor of China trade. At the end of the week there was a report the U.S. was willing to ease tariffs on China during the negotiations and China offered a plan to boost imports. At the end of the week the S&P 500 had gained another 2.9%. The 3rd full week was shortened by the MLK holiday and began with a report that China’s Q4 GDP showed the lowest growth in 28 years, a direct result of the ongoing trade war. We started to see earnings reports from a few of the multi-national companies and, despite concerns about a slowing global economy, the reports were mostly in line with expectations. At the end of the week Commerce Secretary Ross said, “the U.S. and China are miles and miles from a trade agreement”, but a deal to reopen the government had the S&P 500 close the week little changed. This week we saw 30% of the companies in the S&P 500 report quarterly results, the busiest week for earnings reports this quarter, and they were generally better than expectations. Market leader Apple was a notable winner as their sales and earnings, while not exceptional, were much better than many had feared sending those shares and the overall market nicely higher. The S&P 500 ended the 4-day session up another 1.5%.
February is the only month that has an average return over the last 90 years of 0. During the month we are going to see the remaining 50% of companies in the S&P 500 report Q4 earnings, but the focus is likely to continue to be on a trade agreement with China. We do have the possibility of another government shutdown mid-month and, if that can be avoided, we believe the market will greet the news favorably. The market appears to want to go higher as money managers are fearful of being out of the market if there is a trade agreement with China. Concerns about rising rates appear to have been placed on the back burner by recent Fed comments and economic numbers are pointing towards continued growth. The upside catalysts are earnings, lower interest rates and a trade agreement with China, so money managers continue to buy the dips. The biggest risks to the market would be some disruption of the trade negotiations with China or a long-term government shutdown.
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