What’s on Tap: Stocks Start Strong; Bond Market Rallies

  • January Barometer: Reliable Stock Profit Indicator?

  • Investors Welcome Patience on Benchmark Fed Funds Rate

  • Earnings Drive Markets and Reveal Two Economic Trends

  • Financial Planning Friday: Do You Have an Emergency Fund?

  • Webinar Replay: Looking Ahead to 2019—What Could Go Right

  • Looking Ahead to State of the Union, Service Sector and Consumer Credit Reports

U.S. stocks posted strong gains in January in one of the best starts to the year in decades. The Dow Jones Industrial Average returned 7.3%, its best opening month since 1989, while the S&P 500 index’s 8.0% rise was its best since 1987. 

Foreign equities gained ground, but couldn’t keep pace with U.S. stocks. The MSCI EAFE index, a measure of developed international stock markets, returned 6.6%. The bond market, which was flat in 2018, also rallied. The Bloomberg Barclays U.S. Aggregate Bond index gained 1.1% as yields fell on all but the shortest-maturity securities.

January Barometer: Reliable Stock Profit Indicator?

With January’s weighty returns, you may soon hear talk of the “January Barometer”—an old trader’s saw that suggests if stocks are up for the month of January, they’ll also be up for the year.

Note: Chart shows January and calendar-year returns for Vanguard 500 Index from January 1977 through January 2019. Source: Morningstar.

Note: Chart shows January and calendar-year returns for Vanguard 500 Index from January 1977 through January 2019. Source: Morningstar.

If only it were that simple. The chart shows that, just as a losing January doesn’t consistently spell doom, a great January doesn’t guarantee outperformance. You only need to look back to last year for an example of stocks gaining ground in January before ending the year in the red.

Investors Welcome Patience on Benchmark Fed Funds Rate

 Federal Reserve Chair Jerome Powell confirmed this week that policymakers aren’t planning to raise the benchmark fed funds rate  for the foreseeable future. Concerns over challenging crosscurrents—from the threat of another government shutdown to weakening global growth—gave the Fed the option of taking a moderately more cautious stance given that both unemployment and inflation remain low.

 To that end, Friday brought additional positive news for the economy when the Labor Department reported that U.S. employers added 304,000 jobs in January, exceeding expectations. The unemployment rate ticked up to 4.0%, but this was in part due to the government shutdown—a temporary occurrence which we hopefully won’t repeat.

Earnings Drive Markets and Reveal Two Economic Trends

By the end of this week, more than 230 of the companies in the S&P 500 index will have reported their fourth-quarter earnings. We’re seeing two main trends: A healthy U.S. consumer and slowing economic, sales and profit growth overseas. While U.S. companies overall are exceeding analysts’ expectations and/or their own guidance from the previous quarter, there are signs that slowing international economies could be a drag on future growth. 

Traders clearly overreacted to some recent gloomy headlines. One firm where the bold print didn’t tell the whole story: Facebook (FB). Concerns about privacy and the spread of fake news have dominated reporting about the company, but it posted record profits and increased its number of daily users in the U.S. and around the globe during the final quarter of 2018. Facebook’s ad-sales model is clearly working. (That said, we’d advise you to be careful with what you share on all forms of social media—to read more about how you can protect your personal information, please take a look at the Investor Protection Checklist our parent company, Adviser Investments, put together.)

Similarly, the biggest news in the energy sector last quarter was the swoon in crude oil prices. But ExxonMobil (XOM) reported full-year cash flow from operating activities of $36 billion, its highest since 2014. Production from the oil giant rose over 4.5%.

Microsoft (MSFT), McDonald’s (MCD) and Amazon (AMZN) all posted positive earnings as well, benefitting from strong demand from a healthy U.S. consumer.

We’ve also seen some yellow flags being waved. Despite smashing analysts’ earnings expectations, Amazon stock traders reacted warily, as the e-commerce giant went on to warn shareholders that it didn’t expect the trend to continue. A part of the story: International sales growth slowed to 15% after growing at 29% last year.

Overseas business activity also negatively impacted Apple (AAPL) and Caterpillar (CAT). In line with its earlier guidance, Apple reported a reported a steep drop in sales, mainly due to lower demand for its products from Chinese consumers. Slowing sales in China also hit Caterpillar, with steel tariffs and other rising material costs taking an additional bite of the bottom line for the heavy equipment manufacturer. 

The international picture wasn’t all gloom. Boeing (BA)—another company whose fate is closely tied to its fortunes in China—saw its stock soar on better-than-expected earnings and a heightened outlook for business ahead.

All of the above is in line with our view of a U.S. economy in slow-growth mode.


Financial Planning Friday

Do You Have an Emergency Fund?

When we work with our clients to build their financial plans, the first thing we look for is the strength of their financial foundation. The cornerstone of that foundation is a solid emergency fund.

An emergency (or rainy-day) fund is exactly what it sounds like: Money that you’ve set aside for unexpected situations. Let’s face it, life throws all of us a curveball on occasion. A roof may spring a leak, your car wears out, or your income suddenly disappears. The recent government shutdown was a good reminder of how important a healthy emergency fund is to any financial plan. Without a steady paycheck, many government workers struggled to pay for gas and groceries during the month-long dry spell.

While no one can predict the future, we all can prepare for the unexpected. Your rainy-day fund should be easily and readily accessible. That doesn’t mean a cookie jar of cash, of course. A simple checking account at your local bank with ATM access can be a great option.

Once you've established an emergency fund, you’ll need to determine how large it should be. One longstanding rule of thumb is to keep six months of living expenses at the ready. Two-income households might consider budgeting for a minimum of three months of living expenses instead.

If you would like our assistance in creating an emergency account and then funding it to the appropriate levels, please contact your portfolio team. We are happy to help!


Webinar Replay: Looking Ahead to 2019—What Could Go Right

If you missed it, we encourage you to tune into the on-demand replay of our first-quarter update, Looking Ahead to 2019—What Could Go Right.

The event features commentary and insights from Braver Capital Management’s Chief Investment Strategist Charlie Toole, Portfolio Manager Steve Johnson and Equity Research Analyst Kate Austin. The team shares their views on the end of 2018 and their outlook for the months ahead.

Looking Ahead to State of the Union, Service Sector and Consumer Credit Reports

The president’s State of the Union address on Tuesday night may be the biggest market-moving event next week. At the very least, we can expect a lot of media noise surrounding the speech.

Otherwise, we’ll get fewer economic signposts than we had this week. Among the data we’ll be examining are the Markit and ISM service sector gauges and a report on consumer credit.

Key reads on personal income, spending and savings, construction spending, inventories and core inflation have all been delayed by the government shutdown—it’s not yet clear when they will be produced.

If you’d like to learn more about our tactical or fundamental investment strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, February 1, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. 

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. 

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

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