We attributed the strong January stock rally to a bounce back from the December over-selling that occurred in the equity markets and to the Fed declaring its intention to pause future rate hikes, a stock friendly re-messaging. Earnings season is on us and will be a key driver in near term stock market performance. To date, fourth quarter earnings reports have not been stellar but are largely beating expectations. We also want to revisit the Fed decision to pause rate hikes in the context of an astute question recently asked by a client.
- Earnings Beating Expectations: We know that over time stock returns correlate closely with corporate earnings, adjusting for inflation. The current situation appears to be a period when exceeding expectations matters as much or more than objective earnings. It’s as if investors are exhaling, noting that earnings may not be great but are better than feared. This NYT article illustrates the dynamic.
- What to Make of the Fed “Pause” Decision? A client asked whether the Fed decision to pause rate hikes was in effect “good news” or “bad news”. This Boston Globe article described the decision as a “big, belated Christmas present” for stock investors. We think it’s important to keep in mind that the dovish shift also reflected the Fed’s perception that the risks to the expansion have risen, and it is increasingly concerned about derailing the expansion.
- Stocks and Bonds Rally in January: Investors were net buyers of both U.S. stocks and U.S. bonds in January. Not always, but often investors buy stocks when they are optimistic about growth but buy bonds when they are pessimistic. That begs the question of who has it right on the economy? Stock or bond investors?
- Odds of a Recession in 2020? This Bloomberg article notes that JP Morgan is now more skeptical that a recession is around the corner, moving away from prior advice to clients that odds of a 2020 recession were significant. Schwab's investment strategists get into some of the complexities.
- New Silk Road? At the risk of hyperbole, I’m convinced that one of the most fascinating and significant global economic and policy stories is China’s plan to create a massive transportation network across central Asia. China is building roads and transportation hubs to link vast parts of the world economically. As the U.S. retreats globally, China is making breath-taking moves to expand its global power and influence.
- New Public Maine Company: Covetrus is coming to a stock market near you. This is big news indeed for Maine, as a new public company (Covetrus) debuts this week. Formed from a merger of Henry Schein Inc. and Vets First Choice, Covetrus will become part of the S&P MidCap 400 Index. It’s an animal health and technology firm.
- Wealth Tax Proposals: With the 2020 election campaign starting in earnest, we can expect to see policy proposals floated as candidates race to differentiate themselves and stake out their lanes. In addition to Medicare-for-all, proposals to increase taxes on the wealthy (i.e., Senator Warren's proposal) are certain to be attention grabbers. At this early stage of the national debate, there isn’t much to be gained by focusing on the proposal details, but we did note this article discussing the challenges of taxing the wealthy (however defined).
- Putting the Phone Away: So many of us feel tethered to our phones. It’s an uncomfortable sensation but a stickier connection than we are likely to admit (even to ourselves). Digital Minimalism, a long-awaited book by Cal Newport, publishes this week and makes a compelling case for carving out big blocks of time in our lives for non-computer deep engagement. Eric Barker, a popular blogger, goes so far as to claim this is key to making your life awesome.
- The Benefits of Traveling: Objective research now supports what many know intuitively. Travel is very powerful and benefits us in many ways beyond simply seeing new places. As planners, whenever possible, we like to budget travel separately in financial plans, in part to encourage what we see as a healthy lifestyle choice.
Feel free to send us feedback on any topic or make a request or to forward the notes on to anyone who might be interested.