2019 A Brand New Year

What a difference a month can make.

In a newsletter we sent out last month to clients we counseled investors not to overreact after the market staggered to the finish line in 2018.

As we approached year-end 2018, discussion in the financial press of a coming recession in 2019 was on the upswing. No surprise there: The lack of a trade deal with China, the partial government shutdown, and the general dysfunctions in Washington provided a dark back ground. Add in another interest rate hike by the Fed and talk of continued unwinding of the Fed’s balance sheet, and the market revolted. We saw numerical proof of investors’ bad mood in the January preliminary consumer sentiment.

Setting the Fed aside for moment, since mid-December we’ve seen progress on a couple of the items that were having such a heavy effect on investor sentiment. While there is no deal yet, progress has been made in trade talks with China with the opening of a 90-day negotiating window. There have been some positive indications, such as China’s offer to increase imports from the US over a 6-year period.

Like most, we see even an interim deal with China as an important influence on stock prices. If we get that issue out of the way, which will boost business and consumer confidence, there is still room for the market to do well.

The partial government shutdown was lifted, for a few weeks anyway, but Congress and the president face a looming deadline on February 15th. The shutdown, while a big item in the news, will have as little lasting economic effect in our view.

Looking at recent economic numbers, it has been a mixed bag but overall the lean is to the good. The recent employment report dealt a severe blow to the recession scenario. Coupled with recent comments coming from Fed participants, it looks to us like a “soft landing” can be engineered. This will allow economic growth and profits growth to continue, albeit at a slower pace than 2018.

Regarding earnings, to a degree the volatility we witnessed in the market in December was a result of concerns over an earnings recession. 2018 was an excellent year from earnings growth. According to FACTSET 3rd Quarter 2018 earnings growth was more than 25% year-over-year. 4th Quarter data so far shows a little over 12% growth, with 70% of S&P 500 Companies reporting positive earnings per share (EPS) surprise. While earnings growth will clearly be slower in 2019 (likely single digits), it will still be growth. A shallow negative 1st Quarter is possible.

We are cautiously optimistic for the rest of 2019. There will be volatility moving forward and we definitely won’t maintain the growth pace we have over the last month through the rest of the year.