After a four-week rally, stocks finished close to unchanged last week. The S&P 500 shed 0.2% but is still up 6.4% this year.
The S&P 500 opened sharply lower and then rose the rest of the holiday-shortened week.
Markets rallied on Friday on reports the Federal Reserve may end its regular bond sales sooner than expected. Investors worry these sales pressure interest rates higher and may slow the economy more than expected.
Earnings expectations rose, and growth around 11% is now expected. This quarter, 71% of companies are beating earnings expectations and doing so, on average, by 3%. The percentage beating expectations is average, but the 3% margin is lower than normal. U.S. corporate earnings are regularly stronger than expected. Companies that aren’t doing as well as expected will often warn of poor results and then beat the revised expectations.
Global stocks were also relatively unchanged but finished positive. The MSCI ACWI edged up 0.2%. Bonds finished higher as the Bloomberg BarCap Aggregate Bond Index rose 0.3%.
This week, investors will hear from the Federal Reserve, a large number of companies will report earnings, and Chinese and American officials will continue trade negotiations. It should be an interesting week.
Key Points for the Week
- Big rallies don’t mean future returns will be lower.
- 2019’s January rally has key differences from 2018’s January rally.
- Earnings are weaker than last quarter but beating reduced expectations.
2019, like 2018, is starting off with a bang. Last January, the S&P 500 rose 5.7%. This year, the S&P 500 is up 6.4% with four days of trading left in the month. In the four weeks that ended January 19, the S&P 500 increased more than 10%.
Given the similarity in returns and the rapid move higher, two separate questions come to mind. First, when markets rise rapidly, how do subsequent returns compare to average performance? Second, how similar are the fundamentals between the two strong Januaries?
Going back to the early 1990s, the S&P 500 averaged just under 2.6% per 13-week period (roughly one quarter). In periods when the market has risen more than 5% the previous four weeks, the next 13 weeks averaged around 2.3%. Lower, but still quite positive. If the rebound followed a large decline of more than 10%, like the one in the fourth quarter of 2018, returns edged even lower but remained positive.
These averages hide a lot of variability. There are periods with very strong returns and ones when the market moves sharply lower. The statistics don’t suggest sharp recoveries should lead to portfolio changes.
The fundamentals now, compared to last January, have changed. The steep rise and subsequent decline in early 2018 followed the unnervingly calm 2017. But the months leading into 2019 were anything but calm.
In 2018, valuations on U.S. stocks seemed a bit high, the Federal Reserve was concerned about inflation, and the tax cut had just taken effect. In 2019, risk seems slightly lower, we’ve experienced a decline, and valuations are more attractive. The Fed also seems aligned with the market on rates, so the risk of an extreme overshoot or uncontrolled inflation seems low. Trade risk appears about the same, while the risk of slowing growth is higher.
For investors, this research reinforces something even more important: Don’t let market moves disrupt your plan. Whether the market has gone up or down recently, sticking with a plan designed for your circumstances is key, even when it gets a little uncomfortable or feels like you are missing out.
Kyle and Laura Krier were upset when their black Labrador retriever, Bo, ran away recently. After searching all day, a tip came in. A dog that looked like Bo was spotted with two other animals in a field about six miles from their home. Kyle caught the reunion on film; turns out Bo made some interesting friends on his adventure: another dog and a goat that lived next door.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
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