Markets stalled following an extremely strong move since Christmas Eve, including the best January performance in more than 30 years. During the run, the S&P 500 Index went from one of the most oversold readings to among the most overbought conditions on record. When markets become excessively overbought, it is natural to see a period of consolidation before initiating a new move higher. The recovery has been broad based, with mid- and small-caps beating large-cap stocks.
Earnings season is nearing its conclusion with two-thirds of the S&P 500 Index stocks having reported fourth quarter results. Earnings are tracking for 13% growth on 5% sales growth, which would be the fifth-straight quarter with double-digit growth. Both the percentage of companies that are beating estimates, and the magnitude of the beat are below historic averages, though the stocks’ reactions to the report are at the best level since the financial crisis, reflecting that investors entered the year with a degree of caution. Earnings for the first quarter are estimated to be -2%, which has gained the attention of bears and driven by weakness in energy and materials. For the full year, estimates point to 5% growth.
The March 1 deadline for escalation of tariffs on China is approaching, and the next meeting between Presidents Trump and Xi is unlikely to occur until after the deadline passes. Trump reportedly wanted to meet before the deadline, but the timing didn’t work given next week’s summit with North Korea. Talks among administration officials are being held in Beijing this week with a focus on structural issues such as intellectual property protection and enforcement. There are mixed reports on whether substantial progress in these meetings could lead to a delay in the March 1 deadline.
Shutdown: Budget negotiations aimed to avoid another government shutdown stalled after Democrats insisted on limiting the number of detentions that ICE can conduct. Before this impasse, there had been optimism that the two sides were getting closer, including funding for a border wall. This new disagreement makes the chances that a bill can be agreed upon and a vote conducted before Friday’s deadline unlikely.
Brexit: The odds of a “no-deal” Brexit happening on March 29 are increasing as Prime Minister May has been unable to bring the two sides together and the E.U. has been unwilling to adjust their deal. Economic data in the U.K. reflect the uncertain conditions, with fourth-quarter GDP up 0.2% versus an estimate of 0.3% and 0.6% in the prior quarter. Other economic data points, including industrial production and manufacturing output reinforce the caution.
Details: Markets were little changed last week, with most major indexes fractionally higher. Growth stocks outperformed value and small caps outperformed large. International markets were relatively weak, driven primarily by Brexit fears and weakness in Japan. Bond yields fell across the curve, while credit spreads narrowed. Commodity prices were lower, driven by a 5% decline in crude prices. Investor sentiment continues to modestly improve, though fund flows remain stubbornly weak.
What to Watch
Economic data will be in focus next week, led by the NFIB Small Business Index on Tuesday, consumer inflation on Wednesday, producer inflation and retail sales on Thursday, and industrial production and consumer sentiment on Friday.