The Markets – The S&P 500 index finished January +6.77 the Dow was +6.84% for the month and the NASDAQ finished the month +7.76% according to the Wall Street Journal.
We believe there were several factors driving the markets rebound in January. Not the least of which was that the selling pressure was off that was generated just before Christmas as folks harvested tax losses prior to year-end. Another factor was simply the technical bounce, what technicians call a dead-cat-bounce. The market pulled back roughly 23% peak to trough. Since we are kind of statistics nerds, we believe things tend to digress back to their mean. This digression tends to lead the markets to bounce back about ½ of the pullback or when the markets peak quickly, they tend to draw back about ½ of the fast gain. We aren’t quite to the ½ way mark on the rebound, but we are getting close.
Another contributing factor is the US labor market remained robust at the start of 2019, despite the partial government shutdown and rising concerns on slowing economic activity. Non-farm payrolls rose by 304,000 in January, beating forecasts of 165,000. Another interesting observation related to the government shutdown is that the number of people working part-time for economic reasons saw an unusual surge of around 500,000, pushing the under-employment rate to 8.1% from 7.6%. As the government has now re-opened, we think the negative impact should reverse and that the underlying labor market remains very solid. What does it mean for the Federal Reserve (Fed)? We do not think today’s data will influence the recently decisively dovish tone, as the strong labor market has been a bright spot in the economy.
Last, but certainly not least; the rhetoric coming from Washington surrounding the China trade talks has softened a bit. There is an expectation that since the more high level folks are meeting, as we put pen to paper, that Presidents Trump and Jinping will meet face to face. While we do not expect material details to emerge before the March 2 deadline to extend and expand the tariffs, we do believe there will be significant framework thus the politicians will extend those deadlines pending finalization of the details. If, and when, a deal does come the markets will rally nicely, in our humble opinion.
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