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What a difference two months makes.  February has continued January's uptrend in the stock markets.  As bad as things looked and felt in November and December, this year has felt the opposite.  Markets tend to have momentum, either positive or negative.  Once a trend is established, a catalyst is required to reverse the trend.  The Federal Reserve's comments in Q4 helped fuel the negative sentiment which sent the markets in a tailspin, and their bullish comments in January created the current momentum we are enjoying.  Let's hope it continues.

Please share The Friday Buzz with anyone who may have interest.  Thank you for your time and enjoy the articles!

• The Markets are Off and Running – For Now:  As the markets turned lower late last year, the momentum was amplified by analysts and traders who watch technical signals.  Last quarter, many major technical measures were flashing sell signals.  Well many of those same technical readings have recently turned to buy signals.  Though nothing is ever certain, it is a good sign for markets in the near-term.

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.

As cold gripped much of the nation this week with temperatures not seen in a generation, the markets were feeling much cozier.  The economy, markets, and capital investment are linked to confidence.  Last quarter, confidence was dropping precipitously due to Fed comments, trade issues, concerns about world growth, and the government shutdown.  Since the beginning of January, confidence has slowly been increasing, and this week it seemed to notch up significantly due to the apparent reversal from some of the biggest concerns from last quarter. 

 Please share The Friday Buzz with anyone who may have interest.  Thank you for your time and enjoy the articles!

• Federal Employees Back to Work, but for a Limited Time Only?  Federal government workers came back to work this week.  The brokered deal gives three weeks for Congress and the White House to create a deal regarding the border wall.  So, the 800,000 federal workers are being treated like a McRib sandwich and may be here for a limited time only and get furloughed once again on February 15^th.  There seems to be no desire in DC for another shutdown, but in these times, never say never. 

Summarizing the current state of affairs, it would simply be that the economy and earnings continue to grow but at a slower rate in the face of various risks. Whether that makes the glass half full or half empty may be partially a matter of longer-term perspective or even temperament. At times like this, when the investing and economic waters are muddy, I do know that I sympathize with President Truman, who was quoted as pleading for a “... one-handed Economist. All my economists say on one hand..., then but on the other….”  Investing is ultimately the art of weighing our perception of rewards against risks. For now, our mantra is to proceed but with caution.

• IMF Trims 2019 Global Growth Forecasts: Last October, the International Money Fund (“IMF”) reduced its global growth estimates for 2019 and 2020, based on U.S. and China trade war fears. Recently, the IMF again cut its forecasts to 3.5% growth in 2019 and 3.6% for 2020. Reports like these provide us with a temperament test of sorts. If you have a minute, read this article and see if it leaves you feeling more positive or negative. 

After the new year started with volatility, investors have been calmed by words from the Federal Reserve and hope surrounding U.S.-China trade discussions.  There is still plenty to worry about including the continued government shutdown, Brexit, and potential fallout from the Mueller investigation.  But for the last week, investors were embracing the positive.

Please share The Friday Buzz with anyone who may have interest.  Thank you for your time and enjoy the articles!

• Inflation Holding Steady:  Last Friday the Labor Department released inflation data showing the consumer-price index was 1.9% for the 12 months ending in December.  It was under 2% for the first time since 2017.  Prices in December declined 0.1% from November with help from lower energy costs, which we can all see at the gas pumps.  The 2% number is significant as the Federal Reserve targets inflation of 2% or less and the numbers will give the Fed reason to not raise short-term rates, which they do to contain rising inflation.  This is certainly one reason the markets have been positive of late.

Two important developments have boosted stock markets in the new year. First, the Fed has adopted a more dovish tone relative to additional rate increases in 2019. Second, negotiations between the U.S. and China have apparently been successful in narrowing the trade differences. The relief felt by equity investors is palpable. Perceived risk may have fallen but lurks near the surface of investing waters. Caution is warranted. 

• Powell’s Do-Over: Fed Chairman Powell softened his tone on future rate increases in a recent speech, realizing that the Fed needs to project more flexibility. With inflation in check, we see no reason why the Fed needs to engineer a recession with unnecessary rate hikes at a sensitive time.

We are starting the new year, much how we ended the last - with stock market volatility and uncertainties surrounding global economic growth, Fed rates, tariffs, and the government shutdown.  Most of the current challenges are self-inflicted and controllable to an extent. One does not want to be Pollyannaish, but these challenges can be resolved.  What happens in January may go a long way in determining if they will be resolved or continue to be a thorn in investor's sides.

Thank you for taking a few minutes of your time to read and share The Friday Buzz.      

• What 2019 May Hold for Investors:  This year investors will focus on world growth, the Fed and borrowing costs, and President Trump.  So, basically very little has changed from the last quarter.  This article highlights the key factors for investors for 2019. 

Concerns about the slowing global economy and increasing short term interest rates are valid. However, the fear that likely drove the substantial December stock sell-off appears disproportional to the actual risks to the economy and earnings. Slower economic growth does not equate to a near term recession. What might have been a relatively mild correction was unquestionably exacerbated by a general sense of Washington instability. The massive gain in the U.S. stock market, this past Wednesday, may reflect the perception that the market is oversold, but it is too soon to have any degree of conviction. Given the market volatility and the holidays, the notes this week are few in number and market focused.

• Economy Is Strong. Leadership Is Shaky: This NYT article makes the case that leadership missteps are part of the problem. We agree. The global and U.S. economies are slowing but do not appear to be imminent danger of going into a recession.

There is an old axiom in the investment world, "Don't Fight the Fed."  It means if the Federal Reserve is using monetary policy to grow the economy, then don't fight the growth, and vice versa.  The investment world paused on Wednesday to listen to Jay Powell, the Federal Reserve Chairman.  This was probably the most anticipated Fed meeting of the last few years.  The whole investment world was listening, because who wants to fight the Fed?

Thank you for taking a few minutes of your time to read and share The Friday Buzz. 

• The Fed Raises Short-term Interest Rates:  On Wednesday, the Fed announced it was raising the short-term federal-funds rate a quarter of a percent to a range of 2.25% - 2.5%.  This marks the ninth time the Fed has raised the benchmark since December 2015.  The Fed also felt they would not need to raise short-term rates more than two times next year and the path of future increases was uncertain.  In their released economic projections, the Fed stated they expected core inflation of 2.0% over the next three years, down slightly from 2.1%, and GDP growth of 2.3% in 2019, down slightly from their previous expectation of 2.5% They also expect unemployment to remain low and their long-term growth projection for the U.S. economy remained in the range of 1.8% - 2.0%.  

In these notes, we reward those of you who have been clamoring for more on the yield curve. Ok, that’s a lame attempt at economic humor - it’s entirely possible that no one has ever clamored for more on the yield curve. But the yield curve is back in the news and is quite important to understanding financial markets and potentially recessions, so we dig into it again. Since reading about the yield curve can be a slog, in a word, we’ll reward our readers by taking a break from talking about China and trade. The news on that topic tends to go up and down by the week, and I expect that we’ll return to it soon as it’s a market mover.

• Back to the Yield Curve Future: An inverted yield curve, meaning that short term interest rates have moved higher than long term rates, has been a reasonably reliable predictor of a coming recession. Within the last week, the 2 Year Note yield edged higher than the 5 Year Note yield, causing some consternation. As I write this, the yield on a 2 Year Treasury Note is the same as the yield on a 5 Year Treasury Note at 2.77%. We believe, however, that the appropriate yield curve comparison is the 3 Month Treasury Bill rate at @2.4% to the 10 Year Treasury yield at @2.9%, still a healthy positive slope. This San Francisco Federal Reserve Bank paper explains why.