The equity market recovery continued this week as the oil price rebound, Federal Reserve comments regarding ‘patience’ in interest rate policies, and mid-level trade negotiations with China improved investor sentiment. The lack of progress on the government shutdown, which on Saturday will become the longest in history, apparently did not influence market sentiment. Fears of a recession subsided as the Russell 2000® Index led the markets with a 4.83% gain followed by Nasdaq (+3.45%); S&P 500® Index (+2.54%) and Dow Jones Industrial Average (+2.40%.) Furthermore, the World Bank projected 2.9% global economic growth for 2019, a slight decline from 3.0% actual (3.1% projected) in 2018. The revision reflects the trade uncertainties in the absence of formalized agreements.
Wednesday’s release of the Fed’s December meeting revealed that “many” said it could be “patient” about further policy firming, and that, "A relatively limited amount of additional tightening likely would be appropriate." And, comments this week by Fed Chairman Powell and Vice Chair Clarida reinforced the theme of patience. Many analysts now anticipate that, absent increased inflation, interest rates will remain at current levels at least through June. The December CPI Index fell 0.1% to 1.9% annually primarily due to a 7.5% decrease in the gasoline index; the decline confirms that inflation remains low despite wage growth and consumer spending. Sales reports for the strong holiday season reflected a wide divergence among retailers; Macy’s declined 19% after disappointing sales; PVH rose 6.8% with improved guidance. The recovery in oil prices continued as OPEC reiterated its commitment to achieve a balance in supply and demand. Saudi Arabia has already more-than fully implemented its agreed-upon productions cuts; the Kingdom has stated it needs $80 per barrel prices to balance its budget.
Signs of progress emerged this week as trade negotiations in China were extended to a third day; further meetings will be held later this month in Washington. Vice Chairman Liu, who participated in this week discussions, will attend the U.S. meeting. Without elaborating, the U.S. trade delegation commented on a “good few days” of meetings.
Earnings season begins on Monday; Citigroup and then other major banks will report next week. Since the Great Recession, the economy has grown at a moderate pace with ebbs and flows over the period. This year, the Fed projects GDP growth of 2.3%; while lower than 2018, the rate would still be considered modest by historical standards. The stock market buying activity since the New Year is likely an unwinding of December’s worst-case scenario-driven trading. Many analysts lowered earnings expectations; and, stocks remain oversold. Further progress on trade, and positive corporate earnings reports and commentaries, may provide a catalyst for equity market gains over the next few weeks.
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
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