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The Northern Star Newsletter 1/14/19 - Markets Relax and Rally

Message from Jon

Market Update:

 

Like the weather here in Indiana, the market seems to be ever changing and quite volatile. One day, we experience euphoria, while the next, there's rain drizzle followed by heavy, wet snow conditions.

The market data seems to be questioning the strength of the recent rally based upon suggested concerns over the amounts of debt companies are holding on the balance sheets 1 These concerns, albeit valid, should be causing the market conditions to decline, but instead, this market has rallied recently, which is a bit of a head scratcher.

According to Jeffrey Gundlach, the CEO of DoubleLine Capital, the US economy is being held afloat on a sea of corporate debt, and concerns over the ability to float indefinitely is weighing heavily.2 This concern certainly adds to the focus of the Fed rate increases in 2019 and beyond.

Recently, I have been searching for high-quality companies with low to zero debt on their balance sheets and was amazed that so far I have found only 28 companies out of the S&P 500 companies have zero debt! This just goes to show you that in the past decade, since low borrowing costs have been the norm, just how many companies have not been able to resist the temptation of borrowing money. We know what happens with consumers when they borrow money and are found wanting when a job loss or critical illness happens. For corporate America, the same could happen with the next big recession and slow-down in economy and consumer demand!

We will have to wait and see...

Till we speak again, baby it's cold outside, so bundle up and keep your shovel handy!

Jon

 

Sources:

  1. https://finance.yahoo.com/news/gundlach-debt-financed-share-buybacks-141337907.html
  2. http://fortune.com/2019/01/12/jeffrey-gundlach-us-debt/


Markets Relax and Rally

WEEKLY UPDATE - JANUARY 14, 2019


After months of volatility, markets relaxed a bit last week. For the first time since October, the S&P 500 went 5 days without a 1% gain or loss.[1] The Cboe Volatility Index, or VIX, also fell to lower than 20 - in December, it spiked above 35.[2]
For the week, the S&P 500 added 2.54%, the Dow gained 2.40%, and the NASDAQ increased 3.45%. All three indexes are in positive territory for 2019.[3] International stocks in the MSCI EAFE grew as well, with a 2.85% weekly gain.[4]

What drove last week's gains?
Updates on trade and monetary policy contributed to investor decisions, yet again.[5]  

1.The Federal Reserve made dovish comments.

Last week, multiple Fed officials gave speeches indicating our central bank would carefully approach its interest rate decisions in 2019. Fed Chairman Jerome Powell described the policies as "flexible" and "patient."[6]
 

2.A trade resolution seemed more likely.

Many investors believe that efforts to resolve trade tension between the U.S. and China made progress last week. On Wednesday, January 9, talks concluded in Beijing after three days of negotiations, and China said the "in-depth" meetings made a resolution possible.[7] The next day, U.S. Treasury Secretary Steve Mnuchin announced that a high-level Chinese policy advisor is coming to D.C. later this month for further talks.[8]  

What is ahead?

Last week's trade and policy headlines seemed to ease some of the risks on investors' minds.[9] However, both challenges and opportunities remain.

This week marks the beginning of U.S. corporate earnings season. Analysts have low expectations for companies' 4th-quarter performance, especially after a number of large corporations released warnings about their results. However, analysts still predict that S&P 500 companies experienced 14.5% profit growth. In addition, the generally sour, pessimistic mood surrounding earnings could support equities in two ways: 1) Investors may not react strongly if companies miss projections, and 2) any companies that have surprisingly good results could see stock price jumps.[10]  

Along with earnings results, investors will be paying close attention to companies' commentary on business in China.[11] Some experts believe Chinese economic growth is slowing, which is already affecting market performance. On Friday, markets stumbled a bit as analysts considered data and commentary on China's economy. These details will remain important to watch - and see how they relate to trade.[12]  

In addition, while the U.S. federal government shutdown has not yet had a large market impact, if it continues for too long, it could sizably affect the economy.[13]  

We will continue to monitor these and other financial perspectives as we determine where the markets are - and what may be on the horizon. If you have any questions, we're here to talk and listen.


ECONOMIC CALENDAR

Tuesday: PPI-FDWednesday: Retail Sales, Housing Market IndexThursday: Housing Starts, Jobless ClaimsFriday: Industrial Production, Consumer Sentiment




Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.