Confirmed Uptrend Remains in Place

Last week’s equity market performance allowed for traders to cash out on the best four-week performance for the leading US equity market indices in years. The largely horizontal weekly move by US equities did reflect a degree of weakness and caution, but did not reflect any meaningful shift in our recently confirmed uptrend.

The caution that framed last week’s trading was more a function of uncertainty than anything else. That uncertainty was largely offset by solid quarterly earnings and a continued stream of constructive economic data. The continuing concern expressed by many economists and portfolio managers has to do with the specter of unresolved trade differences between the United States and China. Chinese Vice Premier Liu will be in Washington DC for two days this week as negotiations continue to move forward. Baring a deal, March 1st is the date on which US tariffs on Chinese goods moves from 10% to 25%. Given the fragile nature of the current global economic expansion and decelerating industrial output in Europe, China and much of the globe, a trade deal between the United States and China – the world’s two largest economies – is extremely important. This week will hopefully bring a degree of clarity on the negotiations. In that event, look for investors to adopt a more sure-footed posture in coming weeks.

Though not a source of caution, as has historically been the case, this week the first FOMC Meeting of 2019 takes place. It will be followed by a press conference by Chair Powell on Wednesday at 2:30 pm. I have not spoken to a single economist or strategist that believes the Fed will raise rates this week. Additionally, consensus is expecting a reiteration of recent talking points with a focus on data and patience. In that event, look for traders to whistle past what has recently been a source of tremendous turbulence for the market. As indicated in recent notes, inflation is certainly not running at a rate that would require an additional tightening in the near term. Energy prices have remained on a downslope, housing prices are off their highs – nationally, wage inflation has remained at or close to target, and nearly every other economic measure of metric seems to indicate that the economy is expanding at a healthy, non-inflationary rate.

The monthly Employment Report for January is out Friday at 8:30 am. Don’t expect the type of fireworks we saw as a result of the December Employment Report. As I am certain you remember, December’s job growth was significantly stronger than Econoday consensus had been calling for – coming in at +312K, while the unemployment rate ticked up to 3.9%. Econoday is calling for a monthly gain of 158K for January. It will be interesting to see how the manufacturing vertical performed In January. In December, manufacturing saw a gain of 32k jobs. Econoday consensus is calling for a gain of 15K.. The unemployment rate is expected to remain at 3.9% but the high end of the range is 4.0%.

Q4 corporate results continue this week. Large-cap tech will take top billing now that the financials have largely wrapped up. Apple (AAPL) reports on Tuesday. According to the Nasdaq earnings calendar and Zach’s, the consensus of analysts that cover the name are forecasting an EPS of $4.17 versus last year’s $3.89. Facebook report results on Wednesday. Consensus is forecasting an EPS of $2.17 – down from a year ago, which was $2.20. Microsoft also reports on Wednesday. Consensus forecast is EPS $1.09 versus a year-ago $0.96. Amazon’s consensus EPS forecast is $5.49. Given the biblical trouncing the large-cap sector took in the second half of 2018, and where many of these names are relative to their respective 52-week highs, the bar is set very low for results this earnings season. Q4 results for the vertical may well act as a trigger for a renewed push higher for equities. It will be very interesting to see how guidance plays into that narrative – particularly given the overhang represented by privacy concerns and potential regulatory oversight.

Even if US equities regain a degree of positive tone this week, the sledding may get a bit more difficult in coming weeks. As mentioned earlier in the note, declining industrial production around the globe, concern over consumer sentiment as a result of the partial government shutdown, and continued unresolved tariff negotiations could all sap investor enthusiasm in February.

Flickr photo: Tasayu Tasnaphun

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