The Federal Open Market Committee met on Wednesday, January 30, 2019, to discuss the state of the economy and determine policy. After the meeting, Fed Chair Jerome Powell offered a positive assessment of U.S. economic strength that was leavened with a few concerns.
“We continue to expect that the American economy will grow at a solid pace in 2019, although likely slower than the very strong pace of 2018…Despite this positive outlook…Growth has slowed in some major foreign economies, particularly China and Europe. There is elevated uncertainty around several unresolved government policy issues, including Brexit, ongoing trade negotiations, and the effects from the partial government shutdown in the United States…We are now facing a somewhat contradictory picture of generally strong U.S. macroeconomic performance, alongside growing evidence of cross-currents. At such times, common sense risk management suggests patiently awaiting greater clarity…”
The Standard & Poor’s 500 Index (S&P 500) welcomed the news and delivered its best January performance since 1987, reported Reuters.
Earnings may have helped. Through the end of last week, almost one-half of companies in the S&P 500 had shared fourth quarter 2018 earnings. FactSet reported the blended year-over-year earnings growth, which includes earnings for companies that have reported and earnings estimates for companies that have not yet reported, was 12.4 percent. That is lower than the 20-plus percent growth companies have delivered since late 2017, however, it’s the fifth straight quarter of double-digit earnings growth.
There was good news to close the week, too. The Bureau of Labor Statistics reported far more jobs were created in January than analysts had anticipated, although unemployment ticked higher for the month because of the government shutdown, reported Bloomberg.
THIS WEEK IN THE MARKETS
Overall, January’s performance was quite strong. The S&P 500 rose 8 percent, the MSCI ACWI climbed 7.9 percent, and the Aggregate Bond Index gained an impressive 1.1 percent as rates declined during the month. Bond prices typically move in the opposite direction of interest rates.
Last week’s Federal Reserve meeting was a stark contrast to December’s. At last week’s post-meeting press conference, Fed Chair Jerome Powell said the Fed would be hesitant to raise rates given signs of economic weakness and uncertainty. Stocks rose sharply on the news.
At the December meeting, economic data was showing early signs of weakening and concern was spreading about a recession on the horizon. But, at the Fed’s press conference, following a unanimous decision to raise rates, Powell showed limited concern for the market’s outlook. U.S. stocks dropped sharply and finally bottomed on Christmas Eve.
While signs of slowing in the U.S. economy remain, economic data last week supported the market, too. As the accompanying chart shows, the U.S. jobs report was exceptionally strong in January, although revisions to previous months showed they were slower than initially reported. Nonfarm payrolls surged 304,000, far surpassing estimates of 170,000 new jobs. Revisions to the November and December data reduced the large gains in those two months by 70,000. Monthly wage gains were only 0.1 percent, but they have still risen 3.2 percent over the last year. A strong jobs report should support consumer spending and reduce the risk of a recession in coming months.
The Fed’s transition to being dovish on rates may reduce the sharp market reactions to stronger economic data. Strong economic reports may cause investors to focus on improved earnings rather than be concerned too much good news will push rates higher.
KEY POINTS FOR THE WEEK
- The U.S. jobs report provided evidence of ongoing U.S. economic strength.
- The Fed reinforced its expectation future growth will slow and is nearing the end of its tightening cycle.
- Earnings were generally positive, and markets rallied on the news.
What are we READING?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
The American Opportunity Tax Credit (formerly known as the Hope Credit) and the Lifetime Learning Credit are two possible credits taxpayers should be aware of when your kids are attending college. Both credits have income thresholds that eliminate the credits when your income exceeds certain limits. Also, college expenses paid using a 529 savings plan do not qualify for either credit. The maximum per year American Opportunity Tax Credit is $2,500 per student and $2,000 per student for the Lifetime learning credit. Learn more at the link above and reach out if you have any questions on your particular situation.
A beach in Northern California is now overrun by elephant seals due to the government shutdown. The seals took over when federal workers were not monitoring the beach as well as high tides and storms forcing them to this drier beach. The park has decided to keep the beach temporarily closed so as not to disturb the elephant seals. There are now around 50 seals on the beach and 35 baby seals as winter is when elephant seals birth and nurse their young.
SOME OF THE BEST INVENTIONS OF 2018
Time Magazine asked its editors and correspondents to nominate inventions that are making the world smarter and more fun. The magazine whittled down the suggestions to 50 inventions it considers to be the very best. They include:
- Off-the-rack bespoke clothing. If you have ever found yourself between two sizes or have had difficulty figuring out women’s swimsuit sizing, you’ll appreciate an innovation offered by a Japanese retailer. All you have to do is put on one of the company’s “…stretchy black bodysuits…covered in white dots, which enables consumers to make a ‘3-D scan’ of their bodies in the comfort of their own home, via a companion mobile app.” Once you’ve completed the scan, you can order custom-fit clothing. Next up: custom shoes.
- Blankets that ease anxiety. Science suggests there is a connection between insomnia and anxiety and we all know how important sleep is. Weighted blankets offer gentle pressure that may help soothe the nervous system and improve sleep, according to Time. Retailers suggest consumers opt for blankets with a weigh equal to 10 percent of body weight. Be forewarned. The blankets come with a hefty price tag.
- A gravity-defying toolbox. If you’re looking for the perfect Valentine’s gift for a friend or family member who uses tools in tough environments, this might be a good choice. A former F-16 aircraft mechanic designed a flexible toolbox that stays on curved surfaces without slipping.
- A compass that points to friends and family. If you stress over the possibility of a child or pet getting lost at a crowded event or in an unfamiliar place, you may appreciate these paired compasses. They use GPS technology, in tandem with long-wave radio frequencies, to help people keep track of each other.
Just for fun, check out the other inventions at Time.com.
“The fact is that my brain goes out to play. That’s what creativity is – intelligence having fun.”
~Joey Reiman, American businessman
"People do not decide to become extraordinary. They decide to accomplish extraordinary things."
~ Edmund Hillary, Mountain Climber
"Somewhere, something incredible is waiting to be known."
~ Carl Sagan, astronomer
"Seek first to understand, then to be understood."
~ Steven Covey, Author
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RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and is subject to change without notice.
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The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
The Barclays Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investors Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices.
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