The bull market turned 10 on Saturday at the end of a week that was generally negative for stocks. Friday’s jobs report surprised on the downside, with just 20,000 new jobs created. The data seemed inconsistent with economic reality, but so was the 300,000 jobs announced last month. The reality is probably somewhat in between. On the brighter side, the employment rate ticked down, and real wages continued to grow at a healthy pace.
The worries for the week were the by-now familiar ones: US/China trade, weak European growth, a slowdown in corporate earnings. As to China, this is the first major trade deal between the two countries so it’s not surprising that it advances in fits and starts, but it’s in the best interests of both sides to get something done. China, in particular, is feeling the pressure as its economy slows. In Europe, growth has disappointed for a decade but the ECB seems to be recognizing this and is taking measures that should be positive for stocks.
Earnings have slowed; though, nearly 70% of the S&P 500 reported earnings that surprised on the upside in 4Q, near the historical average. Earnings ended up around 13%, the fifth straight quarter of double-digit growth. Looking ahead, there’s an expectation that year-over-year earnings growth will fall by a little more than 3% in Q1, the first quarterly decline since 2016. This may be in part a function of tough comparisons. To date, the market has taken this possibility in stride, with the S&P 500 up around 9% on the year.
The upcoming week looks a little light on news. We’ll be watching the trade headlines like everybody else.
GAIN: Active Asset Allocation
Not a lot of green in a week when the S&P 500 fell 1.24%. Markets in China, Europe and Latin American also saw declines. Equities have had a nice run to start the year, so a pullback makes sense.
Spooked by December’s market action, a lot of investors appear to have missed out on this year’s rally, based on an analysis of fund flows. Some may now be chasing the market higher. We expect the data to continue to show slowing global growth, but there are positive signs as well. Consumer spending was strong in 4Q, for example, up 4.6%, providing support for ongoing growth.
On this 10-year anniversary, it’s worth pausing for a minute to consider how far we’ve come. Since March 2009, the S&P 500 has more than quadrupled, the Dow is up almost 300% and the Nasdaq has climbed by nearly 500%. As has been noted, bull markets don’t have expiration dates; they’re usually undone by policy mistakes. While our outlook has turned more cautious, we continue to see underlying strength and are encouraged by central bank policies that have generally been supportive of stocks.
PROTECT: Risk Assist
Five straight days of stock market declines pushed the CBOE VIX Index up slightly on the week, from 14.63 to 16.05, still well within normal range. This in spite of a jobs number that was generally characterized as “disappointing.”
The 2.5% stock market decline from recent peaks somehow seemed bigger than it was, possibly because investors still have December’s near-20% decline in the back of their minds. The ECB provided some drama on Thursday when it reversed course, announcing a series of policies meant to support growth within the Eurozone. Still, the market managed to take this more or less in stride, too, suggesting that for the moment, at least, expectations of lower growth are more or less priced in.
SPEND: Real Spend
Bonds generally had a good week as weakness in stocks pushed investors into fixed income assets. Investment-grade bonds climbed 75 basis points as prices on the 10-year Treasury fell 12 basis points. In the equity yield space, domestic and international REITs did best, just slightly positive. Emerging market bonds continued to struggle as expected weakness in the dollar has yet to materialize.
Long-term Treasurys were among the best performers on the week, while high-yield was down slightly based on the Bank of America Merrill Lynch HY Index. Convertibles declined. Almost alone among the equity indexes, utilities saw positive returns. The S&P MLP Index was up slightly.
On the year, stocks remain well ahead of bonds (+9% v. +1.4%), though bonds still lead on a trailing 12-year basis with stocks down -2.7% and investment grade bonds up +3.6%.
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