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Market Recap Week ending 2.15.19

-Darren Leavitt, CFA

Markets enjoyed a nice rally last week.  The Russell 2000 led the way with a gain of 4.2%, the Dow added 3.1%, the S&P increased by 2.5%, and the NASDAQ advanced 2.4%.  Treasuries sold off a bit last week with the 2-year yield increasing 6 basis points to close at 2.52% and the 10-year yield advancing 4 basis points to close at 2.67%.  Gold and Oil were up on the week and closed at $1322 an Oz and $55.56 a barrel. There were no changes to our models last week.

Sentiment on trade was optimistic as the US and China met for another round of negotiations.  Trump was constructive on the ongoing discussions and is reportedly considering a 60-day extension to the deadline of March 2nd.  Markets were also relieved that Congress had passed a government spending resolution and that the President was on board with the resolution.  Additionally, the market seemed unfazed with Trump’s declaration of a national emergency on the southern board- it was widely expected after the budget resolution’s funding of the border wall fell well short of what the administration had been looking for.  One other thing worth mentioning out of Washington last week was the proposed bill by Senator Marco Rubio that would effectively tax buybacks the same way dividends are taxed.  If passed this would certainly have long-term implications for the stock market but had very little influence on last week’s market action.

Central bank rhetoric continued to be quite dovish as bankers continued to discuss the end of balance sheet normalization and in Europe talk of an actual move to expand their balance sheet further.  Economic data reported last week seems to align with this more dovish tone.  Specifically, Retail Sales for December decreased by -1.2% versus an expectation of +0.2%.  Industrial production also fell short of expectations coming in at -0.6% versus a consensus of +0.2%- the data suggested weakness in most durable goods industries with motor vehicle assemblies taking a notable hit.    A preliminary read of the University of Michigan’s February consumer sentiment was a bit better than expected, coming in at 95.5 versus a consensus of 95.  Interestingly, inflation expectations fell to the lowest level in the last 50 years.  This is quite evident in the Fed funds market where pricing shows no expectation for another rate hike this year.

On the technical front, the S&P was able to break through resistance at its 200-day moving average (2743) and extend the move higher.  The move prompted a bout of short covering and likely has caused many investors who have been on the sidelines to rethink their cash/defensive positions- the so-called pain trade.  2800 is the next level of key resistance and will likely be a difficult one to get through.  The market is clearly extended here, and if combined with the backdrop of a slowing economy, decelerating earnings and the fact that yields have not increased alongside the equity markets move- warrants caution.

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