Week In Brief: February 8th

The Dow Jones Industrial Average trimmed earlier losses Friday afternoon. Propelling the index to its seventh consecutive weekly gain. A sign of the stock market’s resilience. Even in the face of heightened uncertainty.

The index surged in the final 10 minutes of the session to secure a 0.2 percent gain for the week — its longest winning streak since November 2017 when the market rose for eight straight weeks.

Stocks came under pressure earlier in the day amid growing unease about shaky eurozone economic data, renewed trade uncertainty and concerns about weakening corporate earnings.

For Q1, companies in the S&P 500 are expected to post their first year-over-year profit decline in nearly three years.

Despite weakening corporate guidance and some disappointing European economic data, many investors continue to believe the global expansion has further room to run. Especially with The Fed and other global central banks having recently assumed a more accommodative posture. Which market participants view as manna from heaven. A very bullish sign ten years into an expansion that has been partially defined by central bank driven liquidity.

Following the worst December in a century, investors closed the books on the best January in 32 years. Providing a sense of relief as the S&P 500 had been, in the end, very close to a bear market.

The recent rebound underscores the resiliency of U.S. equity markets in the face of shaky economic data, government shutdowns, lingering tensions with China, global growth concerns and consumer wariness. Moreover, as both sides of the political aisle behaved like drunken teenagers on social media, Fed officials and corporate executives provided much needed pragmatism. Lending a degree of calm and certitude that was not emanating from D.C.

As for Q4 2018? It ended up as one of the worst-ever quarterly performances for equities. Christmas Eve’s loss was the largest on that day in history. After plummeting 16 percentage point in Q4, the S&P 500 managed to get off the mat and head higher during the year’s final week. And has continued higher this last month.

Only U.S. REITs and the dollar recorded gains during the year. Everything else — stocks, bonds, precious metals and everything in between — was down for the year. The S&P 500 fell 6.2 percent. The Dow dropped 5.6 percent. The Nasdaq shed 3.9 percent. Marking the worst performances for all three since 2008.

Equity markets outside of the U.S. suffered even more. As Chinese stocks dropped 25 percent. Japan’s Nikkei fell 12.1 percent. European equities lost 13.2 percent. Emerging market indices gave up 17 percent. And amidst a rising interest rate cycle last year, even bonds suffered an uncharacteristic loss. With the U.S. aggregate bond index falling 2.6 percent.

Amplifying Q4’s pain was the fact that many former market leaders simply gave up the ghost. With significant losses incurred by Amazon, Apple, Netflix, Google, Nvidia and Facebook, among others.

Of course, every bad market eventually rebounds.

Since Christmas, the stock market has scaled the walls of fear. As the S&P 500 climbed nearly 13 percent before leveling off during January’s third week. So, the selloff officially began in late September at S&P 500 2929, and bottomed on December 24 at 2351. S&P 500 2351 represents the low. And it would not shock us were the index to turn and retest that level at some point soon. Which will, once again, feel really challenging were it to occur. But that’s how markets establish firm bottoms before permanently moving to higher ground.

Bespoke Investment Group reports that the S&P 500’s gain of 6.5 percent over the first 13 trading days of the year ranked as the index’s sixth strongest start to a year on record. The recent rally proves that there remains a demand for stocks. And provides a solid indicator that six months to a year from now, the market will likely be higher. However, it has created a highly overbought condition. One that will likely bring some choppiness. Even a potential test of the January low, if not even the one achieved on Christmas Eve.

At the midway point of Q4 earnings season, 69.5 percent of companies have beaten consensus analyst earnings estimates. A robust number. However, only 49 percent have beaten on revenues. Which could portend an omen of serious underlying weakness. And thus far, more companies have lowered forward guidance than have raised it. Thought that isn’t necessarily bad, as anything that reduces expectations typically leads to upside surprises.

The meat of earnings season will be served up over the next two weeks as hundreds of major companies prepare to report. These results, coupled with news from the ongoing China trade talks, will largely determine the market’s near-term direction.

The U.S. government shutdown lasted 35 days. The longest political impasse in the nation’s history. Both sides were compelled towards maximum intransigence. The “non-essential” federal workers affected by the shutdown missed a paycheck. Which they received in arrears once the government reopens. Some interesting learnings, among many, from the debacle are as follows:

1. Washington D.C. is a mess. These days, the nation prospers despite the nation’s capital, not because of it.

2. This is primarily because of the two-party duopoly that governs D.C. Which has proven completely ineffective in so much as neither side is led by pragmatic visionaries, but by career politicians interested in revenge politics and winning the weekly news cycle.

3. The damage to the economy is yet to be determined. And could worsen if the doors close again this month.

The shutdown was more irritation than catastrophe. Revealing our political deficiencies more than degrading the nation’s business. We empathize with any of the federal workers who find themselves in a financial pinch due to the missed paycheck. Nor are these workers accustomed to such treatment.

An analysis of federal pay by the non-partisan Congressional Budget Office (CBO) found that when you combine pay and benefits, federal workers make as much as 52 percent more than their private sector counterparts, depending on education levels. It also found that this gap has widened in recent years. Even during the Credit Crisis recession, federal workers kept getting annual pay hikes.

A more recent analysis by the Cato Institute found that federal employees make 76 percent more than private sector workers. Using data from the Bureau of Economic Analysis, the Cato report found that the average federal employee earns $123,160 a year in pay and benefits. Compared with $69,901 in the private sector. Further, the gap had increased since the 1990s, when it was 39 percent.

Federal employees also get generous amounts of paid time off. Including nearly two weeks of paid sick leave, 10 federal holidays and at least two weeks paid vacation.

A Heritage Foundation analysis found that federal employees put in an average 38.7 hours a week, compared with 41.4 in the private sector.

Other reports show that government workers are 38 percent more likely to take time off work for illness or personal reasons. And miss 50 percent more hours than private sector workers.

Essentially, federal workers make more but work less than their private-sector counterparts.

That said, the entire situation was an embarrassment. Government was established so that trains could arrive on time. Bridges would remain erect. Citizens could feel secure. And interstate commerce would transpire upon a level playing field. Today, we’re five days from another potential shutdown.

Few in D.C. appear to be much concerned with leadership. It’s become much more about showmanship. Further underscoring the idea that the federal government has outstripped its intended objectives and potential usefulness. Perhaps we should partially shut down a larger swath of D.C. redundant, expansive apparatus, turn it over to local governments, and gauge the nation’s response. Perhaps we’d quickly determine that much of what is being done in the nation’s capital would be better served by less political, more determined local governments.

The greatest of sages may fall into error. But he does not lie down and make his home there. Yet, neither side of D.C.’s power structure appear in any hurry to stand and lead.

Upward and onward…

Weekly Results

Major indices finished slightly higher last week. The DJIA gained 0.17%. The S&P 500 rose 0.05%. The Nasdaq climbed 0.47%. While small cap stocks gained 0.29%. 10-year Treasury bond yields fell 5 basis points to 2.64%. Gold closed at $1.314.50, down $3.15 per ounce, or -0.24%.