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Market Summary

Global equities continued their New Year rally this past week, driven by optimism over U.S.-China trade negotiations as well as more patient and adaptive commentary on future monetary policy from the Federal Reserve that signaled greater willingness to pause rate hikes. Despite the ongoing government shutdown in the U.S., the Dow, S&P 500, and NASDAQ indices gained 2.4%, 2.6%, and 3.5%, respectively, and the Russell 2000 small-cap stock index rose even further with a 4.8% gain for the week. Outside of the U.S., the MSCI All Country World ex-U.S. index also notched a 2.8% return.

In last week’s U.S.-China trade talks, progress was noted on several issues including purchases of U.S. farm commodities, as well as increased access to China's markets. However, the two nations remain at odds on Chinese structural reforms that would stop alleged intellectual property theft and forced U.S. technology transfer, which has left some investors skeptical of the outlook for a completed comprehensive trade deal in the near term.

Investors also have to contend with the impacts of the ongoing government shutdown, which is extending into a record fourth week with no resolution in sight. The shutdown is beginning to disrupt the IPO process and may cause delays in some of the bigger deals coming to light in 2019. Additionally, an extended shutdown can affect the economy by delaying business permits and visas, reducing service hours at innumerable agencies, and by withholding payment to millions of federal employees that can also hit consumer spending, which makes up about 70% of U.S. economic activity.

Looking to the week ahead, several large financial institutions will be kicking off earnings releases for the 2018 fourth quarter. Investors will be paying close attention not only to fourth quarter results, for which expectations have been revised down sharply, but also to financial guidance for the coming year in light of the notable slowdown in global economic growth. The constituents of the S&P 500 are expected to report average EPS growth of 11.8% for the fourth quarter, which is down from the 17.8% growth expected for the fourth quarter as of the end of September, according to FactSet.

Economic Highlights:

Inflation: The U.S. core consumer price index (CPI) came in line with expectations, increasing by 2.2% year-over-year in December. The lid on rising inflation has provided validation to a pause in interest rate hikes.

Commodities: Despite the significant recent rebound in crude oil prices, elevated U.S. inventory levels and weakening Chinese economic data, which could slow demand, put a cap on the oil rally late last week. Friday’s WTI oil prices ended at $51.59/bbl, which was up 8% for the week but down almost 2% from Thursday.

US Economy – The Week Ahead

Tuesday 1/15/2019

  • S. Producer Price Index (PPI) Year-Over-Year – Consensus Estimate: 2.5%, Prior Month: 2.5%

Wednesday 1/16/2019

  • S. Import Price Index Year-over-Year Growth – Consensus Estimate: -0.5%, Prior Month: 0.7%
  • S. Export Price Index Year-over-Year Growth – Consensus Estimate: 1.5%, Prior Month: 1.8%

Thursday 1/17/2019

  • Initial Jobless Claims – Consensus Estimate: 220,000 (1.9% WoW), Prior Week: 216,000 (-7.3% WoW)
  • Housing Starts – Consensus Estimate: 1,261K (0.4% MoM), Prior Month: 1,256K (3.2% MoM)
  • Building Permits – Consensus Estimate: 1,288K (-3.0% MoM), Prior Month: 1,328K (5.0% MoM)

Friday 1/18/2019

  • Industrial Production (Month-over-Month) – Consensus Estimate: 0.20%, Prior Month: 0.61%
  • University of Michigan Consumer Sentiment Survey (Preliminary) – Consensus Estimate: 96.7 (-1.6% MoM), Prior Month: 98.3 (0.8% MoM)
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