After a historic January run, the S&P finished the first full week of February in what looks to be a consolidation phase. As we thought might be the case, the S&P 500's 200-day moving average has proven to be a level of resistance for the market with a sharp pullback off the moving average in the middle of the week. Still, an impressive intraday rally took hold on Friday to see the market close well off its morning lows. Late Friday rallies have been a good sign during the last couple of years and continue to suggest that buyers abound at these levels. So while stocks may face a battle as they try to work through the 200-day moving average, the outlook is constructive for the longer-term and there are decent levels of technical support close by. This is borne out by the surge in the percentage of stocks above their 50-day moving averages, which typically results in strong returns over the next 6- to 12-month time frame. Importantly, strong stock gains in Januarys tend to beget strong full-year performance.
Economy and Bonds
From a macro standpoint, the economic data continue to be more mixed, but that is probably the best-case scenario for stocks grinding higher. US economic data softened significantly at the tail end of 2018, but a small rebound in the Mfg. PMI and last week's stellar jobs report have tempered the recession talk. Still, consumer confidence has taken a hit, and business investment is rolling over a bit. With the recent mix of data and little inflation in sight, the Fed is probably on hold, and the cacophony of economic naysayers has been quieted. On that note, credit spreads have stabilized and more of a risk-on attitude has been evident. What is perhaps most striking in the recent upleg in stocks has been the behavior of the US 10-year bond yields. One might think that a more lax Fed would allow inflation and growth expectations to creep higher, taking interest rates with them; but global economic woes are keeping inflation expectations and bond yields in the US well anchored. The US's expected GDP growth in the 2-3% range for the year ahead looks downright rosy compared to much of the rest of the developed world. We believe this realization has not been lost on foreign investors.
Trade remains an issue as gamesmanship has once again emerged between the US and China as tariff deadlines draw near. Of great concern is the February 17th deadline with the Eurozone that could lead to the imposition of tariffs on European autos. These tariffs have the potential to wipe out a good deal of the incremental tax cuts in 2019. This is an area to watch as well.
Here's a quick update on fourth-quarter earnings: With 66% of companies reporting, earnings have surprised by an average of around 3%. Revenue growth of 6.5% has contributed to earnings growth of 14% year over year. Fourth-quarter earnings continue to look better than expected; however, expectations for Q1 earnings growth have softened. This is likely a symptom of the slower global growth. Still, there are pockets of strength that are relatively immune to the global slowdown. In our next blog, we will discuss a few of the superior operators.
Finally, our overall valuation model says stocks are still in a sweet spot and should end the year higher than they closed on Friday.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.