Investment Commentary & Outlook - January 29, 2019

The stock market has been “re-liquefied” in January and is off to one of the strongest starts in decades, especially for small capitalization stocks that have “melted up.” The other good news is that unlike the third-quarter announcement season where the stock market was worried about non-earnings-related macro issues, like the Fed interest rate increases and the China trade dispute, so far in 2019, stocks are largely responding positively to their quarterly announcements and guidance.

Furthermore, earnings surprises are bigger than normal. It appears that the analyst community was way too cautious with their fourth-quarter earnings estimates, since many companies are providing positive guidance above analyst consensus estimates. It is important to remind all investors that the good earnings announcements tend to come out early, so later on, the fourth-quarter announcements (by mid-February) may not be that strong. As a result, we expect the stock market to get increasingly “bumpy” in the upcoming weeks.

Now that the S&P 500 has resurged more than 10% from its Christmas Eve lows, a “retest” of those lows is becoming less likely. Ironically, the stock market largely ignored the federal government shutdown and the ongoing Brexit chaos. First-quarter GDP is now expected to be flat due to the federal government shutdown and especially severe winter weather in the Midwest and Northeast. No one really wants to be the British Prime Minister leading up to the implementation of Brexit on March 29th, so ironically Prime Minister May survived a “no confidence” vote after a humiliating Brexit defeat in the House of Commons by a resounding vote of 432 to 202.

Interestingly, in addition to Brexit undermining the British pound, the euro has also been hurt by the Brexit mess. Furthermore, the ongoing “yellow vest” protests in France are also hindering the euro. Of all the reserve currencies in the world, the U.S. dollar remains king and this international capital flight is helping to suppress Treasury yields due to more . . . . read more

Download the Market Outlook Letter — January 29, 2019