Update for February 7, 2019

Higher volatility and rapid changes in market momentum characterized the markets the last few months, and you should expect those trends to continue.

Stock indexes steadily declined in the fourth quarter of 2018 until they hit the recent bottom on Christmas Eve. There was a modest increase alongside a lot of volatility in the last week of 2018.

It generally is wise to ignore holiday-period moves, because there is a very low trading volume. The new year started with a modest gain. But on Jan. 3, the S&P 500 declined 2.5%, because when the markets closed at the end of the previous day, Apple made a disappointing announcement and reduced its guidance regarding its upcoming revenues and earnings. It looked like the decline of the fourth quarter of 2018 would resume in 2019.

But the indexes popped higher the next day and continued rising steadily for a couple of weeks. Markets took a break in late January, and it looked like the recovery might be ending. However, they’ve marched steadily higher for the last week.

Those who bet the decline of the fourth quarter of 2018 would continue into 2019 are feeling a little uneasy. Their feelings probably match those of the investors who were bullish at the close of last summer and watched stocks steadily decline after that.

Interest rates and earnings are the major factors in determining what investors are willing to pay for stocks. Rapid changes in these two factors and expectations for them account for most of the market volatility and momentum shifts.

The Federal Reserve made several changes in its policies and pronouncements in a matter of months. As its forecasts for the economy continue to change, investors will continue to make adjustments in their portfolios.

Earnings also are throwing a curve at investors.

Investors became used to rapid earnings growth in 2017 and 2018 until companies started to dampen expectations. The global economy has been slowing for several quarters, and recent data indicate the U.S. economy also is downshifting. There’s no sign of a recession, but the Fed’s tightening moves still are working their way through the economy.

This is not a good time for an investor to make portfolio adjustments based on momentum or trends. They’ve been changing quickly as the headlines and other daily market noise changes as well. You’ll be quickly whipsawed if you try to catch the changes.

Instead, we focus on the fundamental factors that matter to the markets over time and we don’t worry if the markets are moving against us for a while. We also try to maintain some balance and diversification. Our portfolios don’t have major bets in them unless the fundamental factors have indicated that there’s a high probability of success.

The Data

The manufacturing data is becoming more positive than it has been in recent months.

The PMI Manufacturing Index increased to 54.9 from 53.8. Export sales continue to be weak, but domestic sales are making up for it.

The ISM Manufacturing Index also increased, to 56.5 from 54.3. There was a solid increase in new orders even though export orders had their slowest rate of growth in two years. As with the PMI report, domestic sales are making up for export weakness.

The services sector is maintaining solid growth. The PMI Service Index declined slightly from 54.4 to 54.2. As with the manufacturing report, exports were the weakest component. The index shows that there is steady and solid growth in services.

The ISM Non-Manufacturing Index is similar. It declined from 57.6 to 56.7. Though a decline from last month, the index level indicates solid growth that is sustainable. Once again, exports were the weakest part of the report.

Consumer Sentiment, as measured by the University of Michigan, increased a little from its mid-month flash level from 90.7 to 91.2. But it remains 7.1 points lower than the level it had reached at the end of December. The weakness was in both current conditions and expectations as both components reached their lowest levels since December 2016.

Factory Orders declined 0.6% in November, following a 2.1% decrease in October. Lower oil prices are considered to be a major cause of the decline. New orders for core capital goods declined 0.6% following a 0.5% increase in October. This report was delayed because of the government shutdown and reflects older activity. We already knew November was weak.

Last week’s Employment Situation reports were much better than expectations. They said 304,000 new jobs were created when 165,000 had been the consensus expectation. That’s the largest gap between the number of jobs and expectations since June 5, 2009, according to Bespoke Investment Group. This also was the first time since at least 1998 that the report exceeded expectations by more than 100,000 in two consecutive months.

Average hourly earnings increased only 0.1%, even though their 12-month increase has been 3.2%.

The important thing to remember is that the labor market is a lagging economic indicator. These reports don’t tell us anything about where the economy is headed.

New unemployment claims declined by 19,000 following last week’s unexpected increase of 53,000. The 234,000 still is well above recent levels and the four-week average. Last week’s increase ended a streak of 68 weeks of fewer than 250,000 weekly new claims, the longest streak since January 1970. But weekly claims have been less than 300,000 for 205 weeks. So, the number of new claims is still very low.

The Markets

The S&P 500 gained 1.93% for the week that ended with Wednesday’s close. The Dow Jones Industrial Average rose 1.47%. The Russell 2000 added 2.12%. The All-Country World Index, minus U.S. stocks, increased 0.56%. Emerging market equities appreciated 0.21%.

Long-term treasuries rose 0.31% for the week. Investment-grade bonds gained 0.54%. Treasury Inflation-Protected Securities (TIPS) added 0.08%. High-yield bonds gained 0.70%.

On the currency front, the dollar rose 1.14%.

Energy-based commodities rose 0.20% for the week. Broader-based commodities declined 0.18%, while gold fell 0.95%.

Bob’s News & Updates

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