Investment Commentary – February 12, 2019

Year to Date Market Indices as of Market Close February 12, 2019
Dow 25,425 (8.99%)
S&P 2,744 (9.49%)
NASDAQ 7,414 (11.75%)
Gold $1,314 (1.79%)
OIL $53.34 (15.55)
Barclay Bond Aggregate (1.08%)
Fed Funds Rate 2.50% (last increase was 12/19/18)

Stocks close at 2019 high on tentative deal to avert government shutdown, trade optimism

U.S. stock indexes closed at their highest levels for 2019 on Tuesday after lawmakers reached a tentative deal to prevent a government shutdown and as optimism grew over a potential trade deal between the U.S. and China.

Meanwhile, the S&P 500 finished above its 200-day moving average for the first time in 46 days, marking its longest sojourn under the key trendline since March 2016, according to the Dow Jones Market Data Group.

How did major indexes fare?

The Dow Jones Industrial Average DJIA, +1.49% climbed 372.65 points, or 1.5%, to 25,425.76, while the S&P 500 index SPX, +1.29% added 34.93 points, or 1.3%, to 2,744.73. The Nasdaq Composite Index COMP, +1.46% advanced 106.71 points, or 1.5%, to 7,414.62.

What drove the market?

Democratic and Republican lawmakers reached a deal late Monday to avert another government closure after GOP negotiators agreed to a border-security deal that will involve far less money for an extension of the southern U.S. border wall than President Donald Trump has been demanding.

The tentative agreement, which involves 55 miles of new border fencing, still requires approval from Trump, who reportedly is not “thrilled” but stopped short of saying he will reject it.

Bilateral trade negotiations entered a second day in Beijing, with Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer due to arrive Thursday for more high-level discussions. A 12:01 a.m. Eastern time March 2 deadline is looming for an agreement to be struck between the two countries.
Meanwhile, investors digested a new batch of earnings releases as fourth-quarter earnings season entered its final stretch.

Oppenheimer Analyst (Krishna Memani)Take: Five More Years for This Business Cycle

Slower U.S. economic growth and sound policy could help extend this already prolonged cycle.

While some analysts are predicting a recession will arrive in the near future, I believe the current economic and market cycle will not end in 2019, 2020 or even in the next five years. In our view, this cycle could prove to be the longest we will experience in our lives.

Business cycles usually end with either a policy mistake or excesses in the economic system. The possibility of a policy mistake is lower now than it was in 2018. Last year, fiscal stimulus drove U.S. growth to the highest level seen in years, and that raised expectations of additional monetary tightening by the U.S. Federal Reserve (Fed). The U.S. economy, following a brief spurt of above-trend growth, is now slowing back toward its trend rate. Appropriately, the Fed is backing down from its tightening stance. I expect the European Central Bank will follow the Fed’s cue.

On the flipside, China is putting forth stimulus-lite measures to stabilize its growth. To be fair, the prospect of a deepening trade war between the U.S. and China still looms, but it will be more difficult for the Trump administration to fight a trade war with 2.5% growth than it was at 3.5%. For equity and credit markets, the mix of slower U.S. growth and better policy is preferable to strong U.S. growth and bad policy. I expect market returns for 2019 to be significantly better than those of 2018.

We also think the concerns over growing excesses in the system are generally misplaced, and in most instances border on hyperbole. For example, credit growth tends to be a good indicator of the health and sustainability of the business cycle. Currently, credit growth is running at a rate that is only about a third of the “danger zone” rate that has historically presaged recessions.

Corporate balance sheets, including those of the nation’s banks, look as good as they have in years. Households have spent much of the past decade paying down their debt. The fiscal balances of most emerging economies are strong, with a few notable exceptions such as Turkey. All of this, in a backdrop where U.S. stocks are cheap, relative to U.S. Treasuries at levels not seen since early 2016 and, before that, in 2013. International and emerging market equities are also as inexpensive, relative to U.S. equities, as they have been in years.

Around the web:

NASDAQ bull back?: The NASDAQ modestly outperformed the other major indexes for the week and at one point came close to entering a new bull market. At midweek, the index was up about 19% from a recent low reached in late December, when it entered a bear market. A rise of 20% from that recent low would put the NASDAQ back into bull territory.

Volatility vacation: Although stock market volatility climbed as U.S. equities sold off on Thursday, the market ended the week much calmer than it had been in late December, when there was a surge in volatility. The Cboe Volatility Index, a gauge of investors’ expectations of near-term volatility, slipped on Friday to a level that was 55% below its recent peak on December 24.

Momentum shift: Stocks posted solid gains on Monday and Tuesday before pulling back on Thursday, leaving the S&P 500 and the Dow with tiny weekly gains. For the Dow, it was the seventh positive week in a row.

Other Notable Indices (YTD)

Russell 2000 (small caps) 12.74
EAFE International 5.13
Emerging Markets 7.21
Shiller Annuity Index 3.765

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.