VIA NOVA UPDATE: Stocks rebound on jobs, trade and the Fed.

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  • Trifecta of positive news Friday lifts the S&P 500.  Via Nova’s “Worry Checklist for 2019”

  • Strong employment gains, but softer manufacturing index.

  • Three Fed Chairs speak with one voice.

  • China trade talks resume Monday.

  • The Week Ahead: Trade talks expected to take center stage.

Trifecta of positive news Friday lifts the S&P 500.  Via Nova’s “Worry Checklist for 2019”

Markets began climbing the “wall of worry” in the latest week helped by a strong December employment report, the announcement of trade talks with China, and dovish comments from Federal Reserve Chairman Jay Powell.  These three positive bits of news helped address several key items (not all) on Via Nova’s “Worry Checklist for 2019;” Economic Momentum, China Trade Resolution, and Federal Reserve Interest Rate Policy, respectively.  The other seven items on our list of ten are: Government Shutdown, House Democratic Game Plan, Energy Prices/Potential Cutbacks, Q4 Earnings and Guidance, Brexit, EU Trade Negotiations and Middle East Strategy.  Oil prices bounced higher, easing, though not eliminating, some fears of potential job cuts in the oil industry; positive news on Energy Prices.

Not all the news was positive.  The stock market sold off sharply on Thursday after Apple announced it was cutting its earnings forecast due in large part to trade tensions with China.  Investors worried the Apple news could be representative of all exporters and so may negatively affect Q4 Earnings and Guidance.  However, the news on Friday showing strong job growth, impending trade talks with China, and a more dovish Fed precipitated an even larger market rebound.  Given the current attractive valuations in the stock market, Via Nova believes the markets are likely to respond positively to any improvement in the items in our Worry Checklist for 2019, as we experienced in the latest week.

After a very turbulent start to the year, the S&P 500 finished 2% higher for the week and just under 8% since Christmas Eve.  Energy, communication services and consumer discretionary stocks led the advance, while utilities finished marginally lower.  Another positive signal of broadening market strength was the outperformance of small cap stocks.  Small cap stocks have underperformed the S&P 500 during the market pullback, so the over 3% bounce in the latest week was welcome.  International and emerging market stocks also rose, but less than the S&P 500.

In other markets, the fear and volatility in the stock market pushed down the yield on the 10-year Treasury note as low as 2½% before rising Friday after the strong employment report.  Economic strength increases the odds that the Federal Reserve will continue raising interest rates this year, but futures markets have priced in few if any rate hikes in 2019.  The Bloomberg/Barclays Aggregate Bond Index finished higher.  Oil prices rebounded sharply but remain below $50/barrel.  Inflation hedges, such as gold and Treasury Inflation-Protected Securities (TIPS) gained.  The dollar was slightly lower.  A weaker dollar raises import prices but makes U.S. goods more competitive in the world markets.

Strong employment gains, but softer manufacturing index.

The economy and the consumer remain healthy.  Employers added over 300,000 jobs in December, well above estimates, and previous months’ data were revised higher.  The unemployment rate inched up, but that was due to more people reentering the labor force - the participation rate moved higher, which is a sign of improved optimism.  The participation rate is the percentage of the working age population that is either working or looking for work.  Hourly wages also rose more than expected.  The combination of more people working more hours for more money suggests that when data is reported later this month, it will show personal income rose nicely in December.  However, it should be noted that exceptionally strong job gains in one month are often followed by smaller gains in the following month.  Stay tuned.

Again, not all the news was positive.  The ISM Manufacturing Index, an important and early measure of business activity, was weaker than expected.  We believe the decline in the ISM Index is less worrisome, because the December level was comfortably in expansion territory.  Moreover, the report noted that a high percentage of customers had inventories that were too low, suggesting an increase in orders over the next few months.  As was mentioned in the Via Nova 2019 Outlook, shifts in the timing and tenor of U.S. / China trade negotiations could affect business decisions to speed up or delay new orders, potentially adding volatility and noise to the monthly economic data.

Three Fed Chairs speak with one voice.

On Friday, Federal Reserve Chairman Jay Powell hinted that the Federal Open Market Committee (FOMC) might pause its interest rate hikes while assessing the latest economic and market developments.  On inflation, Powell said he was not worried about the higher than expected wage gains in the employment report.  He added, “And particularly with muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves.

Powell’s comments came during a segment at the American Economic Association’s annual meeting that also included former Fed Chairs Janet Yellen and Ben Bernanke.  The trio offered informative perspectives on the roles and goals of monetary policy in the post-Financial Crisis world.  Importantly, they agreed on many key topics suggesting a strong sense of continuity and stability at the Fed, which also soothed the markets.  One item of note: when Powell was asked if he would resign his position as Chairman if asked by the President, his one-word answer was “no.”

China trade talks resume Monday.

The developments in China trade talks have been encouraging in recent weeks.  China has taken small steps on its own to boost U.S. imports and address other U.S. concerns, but a direct meeting in Beijing in the coming week will hopefully touch on key U.S. complaints such as intellectual property theft and unfair trade practices.  Talking is good.  The markets will watch for further developments that might signal progress.  The latest Chinese manufacturing survey data showed contraction, which may reflect a greater willingness to negotiate a trade agreement with the U.S.

The Week Ahead: Trade talks expected to take center stage.

The economic calendar tends to be light in the week following the employment report, and earnings season has not yet kicked into high gear.This paucity of fundamental data suggests that analysts will be keenly focused on the trade talks in Beijing that are scheduled to begin Monday.The Consumer Price Index is due on Friday, and most economists project that weak oil prices pushed the index lower in December.