January 2019 Market/Economic Review
Well, as forecasted, virtually all major markets increased in January – stocks (US and Int’l), bonds, oil, gold -- across the board. Great news; however, we shall not be caught up in this 1-month euphoria that erased much of December’s crushing -9% decline! I continue to monitor our portfolio rebound to the early Oct 2018 levels, at which point, we will begin the transition to our “Recession Portfolio,” focusing on stability and yield.
The S&P 500 turned in a staggering 7.90% gain in January. As expected, our diversified portfolios trailed this, providing a respectable 4.50% gain for January in the Moderate portfolio – at half the risk (as measured by standard deviation) of the S&P 500.
This week has been overflowing with economic data and news. Primary on my radar:
- Fed stance: Jerome Powell continues to assure markets that the Fed is NOT on a preset course of interest rate increases, most recently addressing the “Blackbox” rate tightening of reducing their $4Trillion balance sheet of US Treasuries. The Fed has been allowing $50B/mo of these securities (purchased during the 2008 Great Recession as a means of Quantitative Easing)) to mature, thus having the impact of a 0.25% rate increase every quarter! Powell stated this week that the Fed WOULD consider reducing this $50B/mo target IF market conditions warranted. My expectation is that the Fed’s actions in 2019 – whether by overt Fed Funds rate increases, or “covertly” by the $50B/mo Treasury maturities – will be an increase of +0.50% from where we stand today. This implies a Fed Funds rate increase from 2.5% to 3.0% by year-end.
- China Trade Talks: Administration had 2 days of trade talks with highest level negotiators of China, and from all accounts, PROGRESS IS BEING MADE. We have a March1 deadline for a “deal” or our current 10% tariff on $200B of Chinese imports increases to 25% -- this would be catastrophic for the markets! My expectation is China will come strongly to the table to reach a deal, primarily because their economy has shown significant weakening over the past 6 months, largely as a result of our tariffs. Look for a deal that resolves and removes the current tariffs from BOTH countries – “YUGE” (Huge) market mover!
- Corporate Q4 2018 earnings: Generally positive across the board, with some notable surprises: Apple (better than expected) and Caterpillar (lower than expected). Consensus estimates put year-over-year earnings growth at 6-8% from Q4 2017 to Q4 2018. This is in stark contrast to the 20%+ gains last year, which were driven by the massive corporate tax rate cut from 35% to 21%. As earnings week closes this week, overall sentiment was positive; however, SEVERAL multi-nationals expressed concern about global economic decline in 2019 (as I warned about last month)
- Economic data: Remains very strong for our economy. Just today, job growth for Dec came in at +304k – far surpassing estimate of +170k. However, Nov/Dec net revisions were -70k, so lower than reported, but still very strong. I expect this growth to continue for foreseeable future – one concern is the wage growth which topped 3% -- that hasn’t occurred since 2008. This is a major Fed focus for potential inflation. Also, manufacturing data, Consumer Sentiment, and Housing sales numbers were all above estimates. My expectation is tepid growth and warning signs internally and externally over the next 6 months as we see the global economic slowdown continue.
- Gold and Bonds: As you know, my favorite investments for 2019 and 2020 – doing very well this month. Our Bond portfolio mix was +1.0%; yielding ~2.6%/yr, and Gold Miner position +7.60%! I expect to see continue moderate growth in these recession stalwarts, and also improvement in our positions in the Utilities, Consumer Staples, and Value stocks as investors begin to batten down the hatches over the next 6 months.
