Investment Commentary – January 22nd, 2019

Year to Date Market Indices as of Market Close January 22nd, 2019
Dow 24,404 (4.26%)
S&P 2,632 (5.03%)
NASDAQ 7,020 (5.86%)
Gold $1,284 (-0.02%)
OIL $52.77 (-15.19)
Barclay Bond Aggregate (-0.01%)
Fed Funds Rate 2.50% (last increase was 12/19/18)

Stocks snap four-day winning streak as trade worries fester

U.S. stocks closed lower Tuesday, snapping a four-day winning streak, as trade woes and fresh concerns over the state of the global economy greeted investors returning from the long holiday weekend. Earnings also remained in focus, with a busy week ahead.

How did the benchmarks fare?

The Dow Jones Industrial Average DJIA, -1.22% sank 301.87 points, or 1.2%, to 24,404.48, while the S&P 500 index SPX, -1.42% dropped 37.81 points, or 1.4%, to 2,632.90. The Nasdaq Composite Index COMP, -1.91% fell 136.87 points, or 1.9%, to 7,020.36.

What drove the market?

Stocks were battered by reports that U.S. officials turned down an offer by China to hold a preparatory meeting on trade negotiations due to a lack of progress in areas including “forced” technological transfers and economic reforms. However, the market trimmed its losses late in the session after White House adviser Larry Kudlow denied that the U.S. rejected China’s overtures.
Meanwhile, if the U.S. formally requests the extradition of Huawei’s chief financial officer, Meng Wanzhou, from Canada over allegations she lied about the company’s dealings with Iran, negotiations with China could become even more difficult.

On Monday, the International Monetary Fund cut its global growth forecast to 3.5% for 2019 from 3.7% in 2018 and from the 3.7% it predicted for 2019 back in October. Unveiling its forecasts at the World Economic Forum in Davos, Switzerland, the fund left its prediction for U.S. growth this year unchanged at 2.5%.

Investors are also digesting a fresh round of corporate earnings and paying close attention to management commentary on the global economic outlook. As of Friday, 11% of S&P 500 companies have reported, according to FactSet, with 56% announcing earnings beats, below the five-year average of 60%.

A partial government shutdown stretched into its 32nd day on Tuesday, and there was little sign of the deadlock breaking. Democrats rejected Trump’s latest proposal to temporarily extend protections for some young immigrants brought to the country illegally as children, in exchange for $5.7 billion for his border wall.

The shutdown has caused a backlog of economic data, with only a smattering of reports due this week, including jobless claims and Markit manufacturing and services purchasing managers index data.

Around the web

What shutdown?: Stocks’ strong gains over the past four weeks have come despite a partial U.S. government shutdown that extended into its fifth week and continues to indefinitely delay the release of key economic reports. Over the past week, there was no break in the impasse between the White House and Democratic congressional leaders over border security issues.

Brexit turmoil: The value of the British pound swung sharply on Tuesday in an eventful day for Brexit, the nation’s planned exit from the European Union (EU). Parliament overwhelmingly rejected a deal that Prime Minister Theresa May reached with the EU, although she later survived a confidence vote. The deal’s rejection set off a hurried process to find an alternative deal over terms of separation from the EU.

Volatility and trading: Although market volatility picked up in late 2018, major banks didn’t see an increase in trading revenue. The five largest Wall Street firms reported their combined revenue from trading operations in the fourth quarter fell 6% from a year earlier, according to The Wall Street Journal.

Dividend haul: S&P Dow Jones Indices is projecting that dividend payments this year by companies in the S&P 500 will grow 7% to 8%. That would be down from the nearly 10% year-over-year growth rate in 2018, but it would mark the 10th year in a row in which dividends have increased overall.

Other Notable Indices (YTD)
Russell 2000 (small caps) 6.28
EAFE International 3.50
Emerging Markets 2.80
Shiller Annuity Index 1.29

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.