VIA NOVA UPDATE: Stocks up for a fourth week.

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  • Trade talk optimism, solid earnings and higher oil prices helped lift stocks.

  • The limited economic data was mostly positive.

  • Solid bank earnings kicked off the Q4 reporting season.

  • China trade talks are making progress.

  • Record government shutdown continued.

  • The Week Ahead: Earnings still the focus in a holiday-shortened week.

Trade talk optimism, solid earnings and higher oil prices helped lift stocks.

The stock market continued its recovery from the sharp fourth quarter decline bolstered by trade talk optimism, solid bank earnings and higher oil prices.  We believe the positive developments in these three items on the Via Nova “Worry Checklist for 2019” can help investors climb the “wall of worry” and lift stock prices to new highs in 2019.  The news flow is unlikely to be consistently favorable, however, and market volatility could continue, but our most likely scenario points to a more favorable environment for equities this year.

The S&P 500 gained nearly 3% in the latest week and is up over 13% since the market low on Christmas Eve.  The index is still roughly 10% below the September peak.  Financial stocks, particularly bank stocks, which have been persistent market laggards, led the market higher followed by industrials and energy stocks.  The more defensive utilities sector declined reflecting investor optimism.  Small cap and international equities also rose for the week but lagged the S&P 500.  As we stated in our previous commentary, Via Nova is very encouraged by the character of the rebound since December 24.  The more cyclical sectors of the market have regained some traction, possibly reflecting greater economic confidence, and the recovery in small cap equities suggests greater participation from the broader market.  The jury is still out on the durability of the latest stock market move, but our most likely scenario suggests that the market will trend higher over the course of 2019.

In other markets, Treasury yields moved higher on the week, pushing down the Bloomberg/Barclays Aggregate Bond Index.  However, the improved investor optimism and higher oil prices that bolstered the stock market also helped corporate bonds, which finished higher for the week.  Oil prices rose another 4%, which should support improved energy earnings and reduce the risks of production cuts and layoffs, another Worry on our list.  Real Estate Investment Trusts (REITS) gained, but Treasury Inflation-Protected Securities (TIPS) and gold fell.  The dollar was stronger, which tends to lower import prices but makes U.S. goods less competitive in the world markets and is a potential headwind for corporate earnings if the trend persists.  The value of the dollar is up 6% over the past year.

The limited economic data was mostly positive.

The economic calendar was light, in part due to the government shutdown which furloughed data collectors.  However, the labor market remained very healthy, based on the continued very low level of initial jobless claims, and industrial output rose more than expected in December.  The one negative was a drop in the latest reading of consumer sentiment.  With the labor market in good shape and incomes rising, analysts preparing the survey believe the tension and uncertainty surrounding trade and the government shutdown is weighing down consumer optimism.  The lack of the usual economic reports means analysts will rely more heavily on management commentary in the quarterly earnings reports to glean insights on the broader economic landscape.

Solid bank earnings kicked off the Q4 reporting season.

Earnings reported by the major banks were solid, and management reported improved loan growth, increased margins and high loan quality, which suggests a healthy economy.  The good start to the earnings season helped lift overall Q4 earnings growth estimates above 14%.  Only 10% of the companies in the S&P 500 have reported, but the percentage of companies beating estimates is above the long-term average.

China trade talks are making progress.

The dribs and drabs of news and rumors on the trade negotiations with China were encouraging and helped give the markets a notable lift entering the long weekend.  Typically, when investors are nervous, they tend not to hold stocks going into a long weekend.   China's chief trade negotiator, Vice Premier Liu He, will visit Washington for the next round of talks on January 30-31.  Talk is good.  There was also a report of an offer from China to purchase $1 trillion of U.S. goods over the next six years.  If such an offer is part of the final trade package, it could be a significant boost to U.S. growth.  We estimate the $1 trillion increase over six years would cut the trade deficit with China in half and add nearly 1% to GDP per year by reducing the economic drag from our trade deficit.  A lower trade deficit is positive for growth.

Record government shutdown continued.

The partial government shutdown continued with little evidence of a plan to end the standoff.  Given that the amount of money in question is a very small portion of total federal spending, the intransigence on both sides appears to be more political than practical.  The White House estimates the shutdown reduces GDP growth by -0.13% per week.

Via Nova believes the government shutdown is more about politics and posturing than broad philosophical differences.  We believe the shutdown is likely to be one of many episodes aimed at stirring voter unrest ahead of the 2020 Presidential election.  We expect more in the future. 

The Week Ahead: Earnings still the focus in a holiday-shortened week.

Following the market closure on Monday, investors will focus on fourth quarter earnings reports from another 60 or so S&P 500 companies due out during the week.December existing home sales will be reported Tuesday by the National Association of Realtors, and the leading indicators index will be released by the Conference Board Thursday.Both reporting entities are nongovernmental.