How would we best describe the last six months? We’d say the market has gone violently nowhere. Markets have taken a breather in the last few weeks after an outstanding start to the year, but the S&P 500 must still regain another 3.3 percent from yesterday’s close to equal its most recent peak in September. Although two corrections in a single year is a rarity, in the last months of 2018 the S&P 500 suffered its second correction of the year falling nearly 20 percent.
As we like to do from time-to-time, below you’ll find an update on the current market headwinds and tailwinds. Since our last update in January, valuations have become less attractive as markets have risen and favorable sentiment readings – a contrarian indicator and short-term negative reading for the market – have given way to signs of greed. Also, the March 1 deadline for a resolution to the tariff dispute with China has been delayed, and the Federal Reserve has indicated they don’t intend to raise rates in the near-term.
- Fed flips dovish. The Fed, perceived by the market as raising interest rates too rapidly, was one of the primary culprits for the late 2018 swoon. They’ve done an about-face, indicating some patience with rates now in neutral territory. Until the economy starts accelerating meaningfully, the Fed should be on the sidelines.
- Trade war is easing. The US has deferred raising tariffs at the beginning of March, and it appears more likely now that an agreement with China will be reached in the coming months.
- Seasonality. After bucking the seasonal trend to end last year, markets performed well in the traditionally strong months of January and February. Historically March and April follow the strong seasonal trend before giving way to the typical weakness we see in summer months.
- Market internals are exceptionally strong. While the S&P 500 has not made it back to its September levels, the cumulative advance/decline line, which is a running tally of the daily number of advancing issues minus declining issues has made new highs. On top of that, the S&P 500 equal-weighted index is outperforming the S&P 500 market cap weighted index, indicating that underlying strength is widely distributed among all equities.
- The economy is still growing. The economy has increased over 2 percent for seven straight quarters. 2018 was the first year since 2004 where all four quarters saw over 2 percent growth. As fiscal stimulus wears off in 2019, questions are emerging if this growth can continue.
- The market is still in correction with no new high yet. While the rally to start 2019 has been strong, it has not resulted in all-time highs which means the six-month trend is still sideways.
- Weak global economy.Global economic data has declined markedly, and global economic activity looks weak.Signs in Europe and Asia point to the potential for a worldwide slowdown if not recession.
- Peaks for leading indicators. One metric we track to measure economic expansion is the Conference Board’s Leading to Coincident This ratio peaked in September 2018. Historically, the ratio peaks 2 to 2.5 years before a recession. Of course, the ratio could turn back up and prove a false alarm.
- US consumer weakening.Retail sales were weak to end 2018. Signs show consumer spending remained weak after the start of the year. A potential rebound in March and into the second quarter seems likely, but time will tell how pronounced the rebound becomes.
On balance, headwinds remain, but tailwinds are picking up strength. Whether or not they will be strong enough to reach the previous market highs of last September remains to be seen. As always, we’re here to serve you. If you’d like to discuss how current market tailwinds and headwinds may affect your portfolio, don’t hesitate to reach out.
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