February 4, 2019
With January up 8%, the saying “as January goes, so goes the year” is obviously a good omen. Between 1950 and 2017, the January barometer has been correct 58 of 67 times (about 87%), according to The Stock Trader’s Almanac. However, I still expect market leadership to become increasingly narrow in the upcoming months, simply because earnings momentum will continue to decelerate due to more difficult year-over-year comparisons. Furthermore, since many multinational companies are now hindered by slowing global growth and a strong U.S. dollar, it remains imperative to own more domestic companies, especially the small- and mid-capitalization companies that benefit when the U.S. dollar is strong.
There are three primary reasons why the U.S. dollar continues to be strong: (1) The U.S. is experiencing stronger GDP growth than other developed nations; (2) the Fed has raised key interest rates substantially above most other reserve currencies, and (3) the U.S. has a strong, assertive leader.
Speaking of the Fed, Chairman Jerome Powell last Wednesday turned very dovish, essentially signaling that the Fed will not raise rates for the foreseeable future. Specifically, in his press conference after the Federal Open Market Committee (FOMC) meeting, Powell said the case for higher rates “has weakened” because of muted inflation and somewhat slower U.S. growth, stressing that the Fed will be “patient” before determining its next move. He also clarified that the current level of interest rates is “appropriate.”
Looking forward, the FOMC minutes said the Fed continues to believe that “the most likely outcome” for the U.S. economy is sustained growth with strong labor market conditions and inflation near 2%. The most interesting comment in the FOMC minutes was this: “In light of global economic and financial developments and muted inflation pressures, the FOMC will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”
In other words, China’s economic slowdown, Brexit, and other global events are now influencing the Fed.
A Great Jobs Report Capped a “Mixed” Week of Indicators
The economic news last week was mixed. On Tuesday, the Conference Board announced that its consumer confidence index declined sharply to an 18-month low of 120.2 in January, down from 126.6 in December. This was the third straight monthly decline and substantially below economists’ consensus estimate of 124. The expectations component plunged to 87.3 in January, down from 97.7 in December and is especially alarming. In past federal government shutdowns, consumer confidence has declined, so it will be interesting if consumer confidence will quickly rebound, or if we will fear another shutdown.
Nonetheless, consumer spending is expected to slow dramatically in the first quarter, while the record January cold snap in the Midwest and Northeast is also expected to curtail consumer spending figures.
On Friday, the Labor Department announced that 304,000 payroll jobs were created in January, substantially above economists’ consensus estimate of 170,000. This marked the 100th straight month of net job creation. The unemployment rate actually rose to 4% from 3.9% in December, due to more workers entering the labor force, as the federal government partial shutdown apparently caused some contract workers to seek other jobs, which substantially boosted the number of workers looking for jobs.
Wages only grew by 0.1% (3 cents) to $27.56 per hour, so wage growth was well below economists’ consensus estimate of 0.3%. The labor force participation rate rose to 63.2%, the highest since 2013. The bad news is that the December payroll report was revised down to 222,000, from 312,000 previously estimated. Meanwhile, the November payroll report was revised up to 196,000, up from 176,000 previously estimated, so in the last two months of 2018, the total of new payroll jobs was revised down by a cumulative 70,000 jobs. Overall, the job market remains very healthy, but with minimal wage growth, inflationary pressures will remain low, so the Fed will not be under any pressure to raise interest rates.
Also on Friday, the Institute of Supply Management (ISM) announced that its manufacturing index re-surged to 56.6 in January, up from 54.3 in December. This was a big surprise, since the consensus estimate by economists was 54.3. Back in November, the ISM manufacturing index stood at 58.8, so the abrupt deceleration in December alarmed some economists, who can now calm down a bit with the January resurgence. These positive ISM numbers bode well for growth in the manufacturing sector. As a result, some economists may now be revising their first-quarter GDP estimates a bit higher.
Overall, we are still in a ‘Goldilocks’ environment with strong job growth, low inflation, stable interest rates, a strong U.S. dollar, and the fifth quarter in a row of double-digit earnings growth for the S&P 500.
As a result, I think we can expect a very positive State of the Union speech on Tuesday night.