Strong Start to the Year Continues
February was in the books as of Thursday, and it was another good (but not great: S&P 500 +3.21%) month for stocks. December was the worst December for the market since the 1930s (-9.03%), and that was followed by the best January since 1987 (+8.01%). While February was good, trading was very quiet. The S&P 500 has closed above its 10-day moving average for 38 straight sessions. That’s the longest such streak in years.
Since 1938, there have been 30 years where both January and February have been positive, and 29 of those years out of 30 have ended up positive, with an average of over 20 percent. This has been the best first two months of a year since 1987, but that year didn’t turn out so well. Each sector in the S&P 500 notched gains for the second consecutive month for the first time since 2013, led by industrials (+19%), energy (+14%) and technology (+14%).
Eight S&P 500 companies rose more than 40 percent in the first two months of the year: Coty, Xerox, Hanesbrands, Xilinx, Mattel, Hess, General Electric, and Chipotle. The index’s eight worst performers, Kraft Heinz, Macy’s, Take-Two, AbbVie, CenturyLink, Newell Brands, CVS Health, and ResMed, all fell at least 10 percent. With 90 percent of S&P 500 stocks above their 50-day moving average, many analysts expect this good run to continue, at least for a while.
The Dow, Nasdaq and Russell 2000 have each climbed in eight consecutive weeks to start 2019. Friday marked the first such occurrence for the Dow since 1964, first for the Nasdaq since 1976 and first ever for the Russell, according to Dow Jones Market Data.
The major domestic stock indexes were mixed but mostly positive last week. The tech-heavy Nasdaq performed best, while the smaller-cap benchmarks lagged. Within the S&P 500, utilities stocks outperformed, while materials shares lagged.
Signs of progress in U.S.-China trade negotiations seemed to lift sentiment for much of the week. Stocks jumped at the start of trading Monday following tweets from President Trump over the weekend announcing that he would delay the implementation of higher tariffs on certain Chinese goods scheduled for March 1. Mr. Trump cited “substantial progress” on a range of issues, including intellectual property protection, technology transfer, currency manipulation, and promised increases in Chinese purchases of U.S. agricultural products and services.
On Wednesday, stocks fell back after the administration’s chief trade negotiator, Robert Lighthizer, told a congressional committee that “much still needs to be done” before an agreement could be reached. Bloomberg reported on Thursday afternoon, however, that U.S. officials were drafting a deal that President Trump and Chinese President Xi Jinping could sign as early as mid-March.
The week brought some important economic releases, several of which had been delayed because of the partial government shutdown that ended in late January, but they did not appear to drive the market decisively in either direction. December data were generally disappointing while more current data were generally more promising. The manufacturing sector remained a weak spot, however, with two separate gauges of manufacturing activity in February falling more than expected.
A measure of consumer confidence in the U.S. rebounded in February. Data released Tuesday showed U.S. home building starts in December were the lowest since September 2016, and the 11.2 percent fall from November was the biggest one-month decline since January 2007. But U.S. building permits rose during the month, by 0.3 percent, meaning a sharp divergence between the number of actual building constructions started and the number of permits filed to build.
The U.S. economy grew at a strong 2.9 percent rate in 2018, just missing President Trump’s 3 percent goal, but at only a 2.6 percent clip in 4Q. Still, by one measure, the U.S. just enjoyed the best full year of economic growth since 2005. So, growth is slowing, but not as much as feared. But business investment dwindled as 2018 progressed and ended the year more with a whimper than a bang, the report showed (the Fed said as much back in November). The U.S. homeownership rate climbed in the fourth quarter to the highest level in nearly five years. Federal Reserve Chairman Jerome Powell said, “The economy is in a good place.”
Longer-term U.S. Treasury yields moved higher for the week, with the yield on the benchmark 10-year note touching its highest level in a month. The 10-year yield moved from 2.67 percent at the start of last week to 2.76 percent at Friday’s close.
In overseas trading, the pan-European STOXX Europe 600 rose despite escalating geopolitical tensions between nuclear powers Pakistan and India and the abrupt end to the U.S.-North Korea summit. As in the U.S., renewed hopes for a U.S.-China trade agreement buoyed stocks. Japanese stocks were up modestly as well.
Mainland Chinese stocks entered bull market territory, with the major indexes up over 20 percent from their recent lows, after MSCI announced that it would quadruple the weighting of China shares in its widely used global benchmarks this year. For the week, the Shanghai Composite Index surged 6.77 percent, marking the benchmark’s biggest weekly gain since June 2015. The large-cap CSI 300, considered China’s blue chip benchmark, added 6.52 percent. Buying from foreign investors ahead of MSCI’s decision helped drive both indexes higher on Friday, which capped a stellar month for Chinese stocks. U.S. dollar- and yuan-denominated Chinese A shares rose 14.89 percent and 25.34 percent, respectively, through the end of February, making them among the best year-to-date performers in emerging markets, according to MSCI data.
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As noted above, Chinese domestic stocks are in a bull market. Still, the CSI 300 remains well below the 2007 record high and below two other recent peaks since 2015. However, China’s latest purchasing managers index, the first official gauge for February, showed activity slumped further while new export orders also slid. Meanwhile, U.S. companies are planning their lowest rate of expansion in China since 2016. Imports to and exports from China plummeted, a sign that higher tariffs are cooling global economic growth.
The CBO says the U.S. will run out of money by September without a debt limit increase. Keith Hall, director of the CBO, forecasts that U.S. debt will grow to 93 percent of GDP by 2029, and 150 percent by 2049, the largest in U.S. history. That’s up from 78 percent of GDP at the end of last year and 34 percent before the Financial Crisis.
Even though U.S. unemployment is near half-century lows and companies are routinely complaining of labor shortages, labor’s share of domestic income has been declining since 1970.
Last week included the first Friday of the month, but it wasn’t a “Jobs Friday.” The February jobs report comes out March 8. And no, it wasn’t delayed by the government shutdown. The report is not tied to the first Friday of the month, as is often assumed. Rather, it’s tied to two separate surveys. One covers households during the week that includes the 12th of the month, and the other asks employers about pay periods that include the 12th. Answers are collected the next week, in this case the week closing February 23, which didn’t leave enough time for the Department of Labor’s numbers crunchers to produce a report by Friday. Because February is the shortest month, its report often gets delivered on the second Friday of March.
Federal Reserve officials are considering whether to allow inflation to rise above their 2 percent target more often. When the inflation target topic came up a decade ago, former Fed chairman Paul Volcker wasn’t thrilled. “I don’t get it,” he said. By setting 2 percent as an inflation objective, the Fed is “telling people in a generation they’re going to be losing half their purchasing power.”
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U.S. crude oil has rebounded 22 percent in the first two months of the year, its best such start in figures going back to 1984, according to Dow Jones Market Data. Oil is heading for its best two-month stretch generally since 2016, when prices recovered after dipping below $27 a barrel early that year.
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U.S. officials are preparing a final trade deal that President Trump and his Chinese counterpart Xi Jinping could sign in weeks, sources say. But administration officials on the record are sending conflicting signals over the prospects for one. Larry Kudlow said the U.S. was on the verge of an “historic” deal, including a cut in subsidies for state-owned companies, and that “progress has been terrific.” But Steven Mnuchin echoed Robert Lighthizer’s more cautious tone and said there was “more work to do.” A summit with Xi may come in mid-March, one source said.Many outside experts fear the disagreements between the two countries might be too big to resolve, and that we should prepare for a future in which talks fail and the trade war becomes permanent.
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Central banks around the world are embracing the virtue of patience. Federal Reserve policymakers have said the U.S. economy is in decent shape but with risks to the downside, therefore any more interest rate hikes will be dependent on incoming data quelling concerns about the outlook. The European Central Bank, meanwhile, is seen taking its time deciding on whether the slowdown in the region’s economy is sufficient to warrant taking policy action or reviving some form of long-term loans for the banking sector. Weak underlying inflation isn’t making that decision any easier.
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