Key points from AIM’s February 2019 market commentary

U.S. equities recorded their strongest January performance in three decades as recession fears have eased from late December

The “January barometer” is an old market theory around the hypothesis that equity performance in the month of January tends to foretell performance for the remainder of the year. While there are many instances in which this theory held untrue, it will be hard to argue in 2019 with equities recording their best January performance in three decades. Looking at the numbers, the S&P 500® Index finished the month up 7.87% and is now up over 15% from the low in late December. The complete reversal of sentiment has been driven by a combination of strong labor market data and the capitulation of the Fed, which now appears to be in a wait-and-see mode for the foreseeable future.

Additionally, strong equity performance also brought on significant tightening of credit spreads in the corporate bond sector with spreads coming in nearly 30 basis points in January. Despite the strong returns across the board, a considerable amount of uncertainty remains around growth as the U.S. and China continue to work out their differences on trade. Both sides met in January to negotiate and while it was reported that “a tremendous amount of progress has been made,” we have yet to see any sort of agreement made by either side. Overall, the developments on trade will be closely watched by market participants over the next 90 days as this likely remains one of the biggest risks to the U.S. economy.

With limited economic data coming from the U.S., investors continue to weigh how insulated the U.S. is from the rest of the world economy

With the government shut down for most of January, economists had to rely on softer data points to project the trajectory of economic activity in the U.S. Adding less clarity to the outlook was the onslaught of negative economic data on the global front. One bright spot that continues to shine is the U.S. labor market, as the latest employment report showed 304K jobs were added to the economy in January. This amount was well above the monthly pace required to keep the labor market steady, and while the unemployment rate did tick higher to 4.0%, we did see the labor force participation rate increase to the highest since 2013 at 63.2%. The healthy labor market is a strong signal for economic growth in U.S. as the economy in a large part is consumption-driven. The first reading on 4Q GDP for the U.S. will be released in late February and most market participants are looking for something north of 2.5%. Overall, it appears that the U.S. economy has been insulated from the weight of slowing growth in the global economy, but we will have a better picture as the delayed data starts to present itself.

The message of patience, pertaining to monetary policy, from Chairman Powell’s Fed was likely an appropriate move given the mounting uncertainties on the global front

Much of the government shutdown headlines were ignored as market participants focused on the Fed’s abruptly orchestrated messaging campaign to inform investors of their preference for patience when it comes to future policy rate hikes. The complete 180-degree shift from Chairman Powell’s Fed was likely an appropriate move given the mounting uncertainties on the global front. Additionally, with the government in partial shutdown and a good portion of economic data delayed, it makes sense to remain in a wait-and-see mode.

Global interest rates continue to decline on poor economic data abroad and this continues to weigh on yields in the U.S.

Global interest rates continue to decline on poor economic data abroad and this continues to weigh on yields in the U.S. as the 10-year Treasury yield remains exceptionally low. Looking ahead we will be monitoring the backlog of incoming economic data in the U.S. to ascertain how insulated the U.S. truly is from the global economy –although we can’t forget the old market adage, as goes January so goes the rest of the year.

Get the full February 2019 Market Update here.

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