I hope everyone has survived the arctic blast covering most of the country, even those of you suffering in the 30’s-40’s degrees in Florida.
As we enter February, I am seeing a number of conflicting signals.
On the economy:
- The positive signs are continued strong employment, improving wages for employees, and a Federal Reserve that seems to be cautious on interest rates.
- The negative signs are slowing business investment and the housing market; declining business and consumer sentiment, especially expectations about the future.
Given that the consumer accounts for roughly 2/3 of the economy, and the history that declining consumer expectations precede recessions (although not in every case) this is a potential red flag. The still open issues of US/China trade and a potential second government shutdown on February 15th also serve to potentially impact economic growth.
Source: SentimenTrader – Recessions in gray bars
On the investment front:
- The positive signs are – the extreme volatility we experienced at the end of 2018 has subsided; corporate earnings for the 4th quarter of 2018 have been pretty good so far; and a more patient Federal Reserve has reduced the concern of interest rates rising too fast.
- The negative signs are – February is historically weak month for equities; the stock market went from extremely oversold at the end of December 2018 to overbought at the end of January 2019; investor sentiment has gone from Fear at the end of 2018 to Greed right now; 2019 has had a similarly strong start to 2018 (Jan 2019 +7.8%, Jan 2018 + 5.6%), recall we had an 8.6% decline in stocks in February 2018.
S&P 500 by month: 1986 – 2018
Source: Strategas source: CNN Money
Given the conflicting signals our outlook is cautious. The fundamentals look okay, with solid corporate earnings, modest inflation, a strong labor market and a newly dovish Fed. The government shutdown will contribute to anemic GDP growth in the first quarter, but a snap-back is likely in the second quarter — as long as another shutdown is avoided. Stay tuned.
I hope this report proves informative.
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February Calendar of Events (comments and additions for future months are always welcome)
- February is Black History Month. Let’s all strive for understanding and acceptance for people of all colors, nationality, and religions.
February 2nd Groundhog Day – rooting for no shadow
February 14th Valentine’s Day
February 18th Presidents Day
Sources: SentimenTrader, Strategas, CNN Money
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