The worst December ever for the stock market was followed by the best January since 1989. The Federal Reserve played a big part in both monthly moves. When the Fed raised rates as expected in December, they disappointed investors by indicating they planned two more rate hikes in 2019. They have since backed off that forecast and now say they won’t hike again until inflation accelerates, even with the economy already roughly at the central bank’s goal of full employment. The Federal Reserve also suggested that it might keep its balance sheet at higher levels going forward than previously anticipated.With the Fed on hold, growth of the U.S. economy over the near-to-intermediate term will be more dependent on fiscal policy(spending authorizations, the debt ceiling), tariffs, European issues (Brexit, populism, and changing leadership in key countries)and the growth rate of China.Eventually the 2020 elections will become an input. And for now, the stock market focus will return to the fundamentals of earnings, cash flow and dividends.
With over 1/3 of the companies in the S&P 1500 having reported fourth quarter results, sales growth is 6.1% higher than last year and earnings have risen 15.1%. Sales and earnings growth are positive for every sector. Companies that have reported above expectations have seen significant upward moves in their stock prices. Consensus estimates for 2019 earnings growth have been declining but expectations remain for further advances this year. The most frequently cited concerns in management conference calls have been trade wars and tariffs along with the impact of a strong dollar on overseas earnings. They see 2019 as another year of steady but perhaps unspectacular growth. The strong dollar may have a particularly negative impact on first quarter earnings.In addition, the first quarter may be impacted by any material costs associated with the government shutdown, and there could be another shutdown before the quarter ends. Tariffs are also an open-ended issue that can impact the first quarter. Tariffs are slated to go from 10% to 25% on about half of what we import. That could change in either direction between now and the end of Marchas talks with China continue.Dividend growth remains stellar with many companies having already announced significant dividend increases for 2019.(continued)February 4, 2019
Nonfarm payrolls increased by 304,000 in January, the most in almost a year, and well above the median estimate of 165,000 new jobs. The figures also included the highest labor participation rate since 2013. The hiring and wage gains underscore resilient demand for labor, and support for consumer spending which accounts for 70% of the U.S. economy. Indeed, a record number of Americans are employed and achieving gains in real wages. That may preempt everything else.
Craig A. Vander Molen, CFA, CPWA ®
Managing Director and Chief Market Strategist
February 4, 2019