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Earnings Beat Expectations to Date and Deciphering the Fed (and More)

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.

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Gov Back to Work, Jay POWell to the Rescue, and Quantum Computers

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!

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Positive Fed and China Trade Talk News Propels Stock Markets to Strong 2019 Start

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.

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Factors in 2019 for Investors, 2019 Retirement Saving Limits, and the World is Getting Better, Really…

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.      

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Positive Economic Fundamentals vs. Negative Investor Emotions

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.

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The Flipping Yield Curve, Recessions, Healthcare (and More!)

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.

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Fed Gives Guidance, China and G20, U.S. Economy (and more)

With the Fed signaling that it may slow the pace of interest rate increases, the stock market is getting some good news. Concerns like trade conflicts and Brexit remain but knowing that the Fed is flexible when it comes to pushing rates up bolsters the positive case for equities.

Thanks to all who read these notes. We enjoy writing them and endeavor to make them worthy of a modest time commitment on your part.

  • Powell Boosts Markets: Fed Chairman Powell indicates that rates are slightly below a "neutral" level. In lay speak, this means that current rates are close to the point that they neither encourage nor discourage economic growth. It signals less tightening in the form of rate hikes for the foreseeable future. We anticipated this “signal” but are still reassured to hear a public statement, given the headwinds facing the stock market. 

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Supreme Court Hearing, Federal Reserve Meeting, & Instant Wine Cellars

Once again, political storylines dominated the news this week though there were some significant investment stories as well.  Enjoy this week's edition of The Friday Buzz.  I hope it's worthy of a few minutes of your time to wrap up your week and kick off the weekend. 

  • Senate Hearings:  As this week's notes are being finalized, all eyes are on the high stakes Senate hearing between Judge Kavanaugh and Christine Blasey Ford.  Rarely have so many storylines intersected for a hearing with politics, gender, the MeToo movement, memories of Anita Hill, and the balance of the Supreme Court hanging in the balance.  The judge's nomination is on public trial and the implications may tower over the upcoming November election. 

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Volatility is Back, as Stocks Drop

On Friday last week the Dow dropped 665 points. Monday, the market was down most of the day but come late afternoon the selling accelerated dramatically. At one point, the Dow was down 1600 points. It rallied back some and ended Monday down 1175 points. Many are wondering what happened and why did the markets fall so far, so fast?

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An Independent Point of View

Fritz Meyer is well respected independent economist and market strategist. He recently spoke to RSWA clients and friends in Portland and Portsmouth. This article summarizes some of the highlights from his presentations. We want to share the most important highlights with clients and friends who were unable to hear him in person. In such politically turbulent times, we believe that it is critical to stay grounded in economic and market fundamentals. In this context, we especially value the independent point of view that Fritz provides.

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