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Weekly Market Update — January 11, 2019

  • The stock markets finished higher for the third consecutive week, with small–cap and international markets outperforming their large–cap counterparts
  • The Russell 2000 Index leapt 4.8%, NASDAQ jumped 3.5%, MSCI EAFE Index moved 2.9% and the S&P 500 and DJIA finished with weekly gains of 2.5% and 2.4%, respectively
  • After this week's gains, the S&P 500 is now up almost 10.5% from its December low
  • The major news topic of the week was the government shutdown, but the markets seem to be taking the longest U.S. government shutdown somewhat in stride
  • The primary drivers of the market seem to be renewed optimism around the U.S. – China trade talks, softer words from the Fed on its interest rate trajectory and pace of rate increases, and good old–fashioned oversold conditions
  • Talks between U.S. and Chinese officials were held in Beijing, and some positive news about reaching a trade deal seemed to be a common news story
  • President Trump cancelled his trip to the Davos World Economic Forum later in the month because of the government shutdown and many had hoped that Trump and Chinese President Xi Jinping might use the Forum to announce a trade deal
  • The Fed released its minutes that showed a more cautious approach to the degree and timing of future Fed funds rate increases, indicating that economic conditions warrant patience

Weekly Market Performance

2019 Starts with a Bang - Like 2018 Did

Stocks rose for the third consecutive week to start the new year and the comparisons to the beginnings of 2018 are eerily similar. In 2019, small–caps are outperforming, and the recent gains dragged the Russell 2000 Index out of bear market territory (a decline of 20% or more from recent highs), making it the last major benchmark to climb out of its bear market malaise.

With a few more weeks like this past week, we will be right back to celebrating the market cresting that psychological 25,000–point barrier, which it did in early January 2018.

Eyes & Ears on the Fed

Minutes from the Fed's December meeting were released on Wednesday and the general interpretation is that the Fed has some room to slow down the pace of future rate hikes.

Fed Chair Powell noted that the Fed would let incoming economic data guide policy and current inflation numbers are well within the Fed's comfort zone of 2%, especially in light of the fact that consumer prices fell last month, mainly due to a drop in fuel prices. Stripping out food and energy, core inflation is up approximately 2.2% in the past year.

The markets appear to be pricing in at least two quarter–point rate hikes in 2019 toward the second half of the year.

The yield on the benchmark 10–year Treasury note ended the week slightly higher as the flight to its safe–haven slowed down.

Government Shutdown Not Moving the Markets - Yet

Interesting to note that the markets have returned three consecutive weeks of positive gains despite the partial government shutdown that is also entering its third week, with not much hope for a resolution soon.

Common sense would suggest that the longer the shutdown occurs, the greater the impact it will have on the economy and markets over time, but so far the impact to the markets have been small.

There are a few data points, however, that investors will watch carefully. Specifically, small business optimism fell in December and the Institute for Supply Management's gauge of service sector activity fell much more than expected.

Then to close the week out, the Labor Department reported that consumer prices rose in line with consensus forecasts, with the core inflation (which excludes food and energy costs) increasing by 2.2% versus a year ago. The Consumer Price Index numbers were in line with expectations.