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Capital Market Impact Weekly market commentary

Trade deal optimism drives markets higher

FEB. 19, 2019
  • Equity markets continued their impressive recovery, with the S&P 500 Index gaining in seven of the past eight weeks and the Dow on an eight-week winning streak, recovering virtually all of the December decline. The S&P 500 is now higher than a year ago, though it remains 5% below the high from September. The breadth of the rally is expanding, with the equal-weight S&P 500 Index outperforming the market-weight version, and the Russell 2000 small cap index up more than 16% this year. A pause here would not be unexpected or unhealthy, as the S&P 500 has gained 18% (more than two years’ worth of average return) in less than two months.
  • Asian markets continued their strength on Monday, with Shanghai gaining nearly 3% on continued optimism on talks between the U.S. and China. Chinese state media was cautiously optimistic, saying that the sides made “important and unprecedented progress.” While nothing has yet been agreed to, talks will continue this week in Washington, with the possibility of a memorandum of understanding acting as a framework to a deal, which could result in a 60-day extension of the March 1 deadline for accelerated tariffs.
  • Domestic economic data released last week was mixed to the point of confusing many economists. Retail sales plunged 1.2% in December compared with an estimate for a 0.2% gain, representing the weakest reading since 2009. A reading this poor is normally indicative of recessionary conditions, though the severity of the decline and the lack of corroborating data elsewhere has some questioning the accuracy of the report. Regardless, economists are slashing fourth quarter GDP growth estimates, with the Atlanta Fed’s GDPNow model predicting 1.5% growth in the fourth quarter versus the 2.7% expected last week. This reading seems to be an outlier, as small business optimism and consumer sentiment were still strong, inflation data is tame.
  • Global Growth: Economists continue to worry about the prospect of a global recession, driven by trade uncertainty and Brexit. The European Commission recently slashed their expectation for growth in Europe to 1.3% from 1.9% in 2019, before modestly rebounding to 1.6% in 2020. Growth in China for 2018 was 6.6%, the slowest pace since 1990, with the consensus estimate for 2019 at 6.2%. The IMF currently expects 2019 growth of 2.1% for advanced economies and 3.7% for the world, though those estimates have been trending lower.
  • Share Repurchases: Companies bought back nearly $1.3 trillion in their own stock last year, a sharp increase from $800 billion in 2017, which was the previous record. This is likely to continue, with announcements this year up 28% from a year ago. This has driven criticism from both sides of the political aisle, including Senators Sanders and Schumer on the Democrat side and Senator Rubio from the Republicans. Regardless of the criticism, estimates show that companies used a lower percentage of the repatriated funds for repurchases this time than they did in the 2005 holiday. A political agreement to curb repurchases is unlikely in this environment, but there clearly will be more attention paid, which may shift capital allocation decisions (perhaps to greater dividend payments) at the margin.

What to Watch

  • This holiday-shortened week will be focused on the Fed, led by the release of the minutes from the recent FOMC meeting on Wednesday, and followed by several speeches by the presidents of the New York and Philadelphia Fed. Economic data is led by durable goods orders and shipments, PMI data, existing home sales and leading economic indicators.

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