The overall economic data was pretty good. We had an over 300,000 jobs number on Friday and better-than-expected manufacturing data out of the US.- Ryan Detrick – LPL Senior Market Strategist
First up, last week saw the emergency of two encouraging data points. Both point to an expanding economy.
Data on US manufacturing came in better than expected. The manufacturing sector continues to expand, reversing December’s weak expansion. In addition, more than 300,000 jobs were created in January while inflation remains contained.
The Fed and the market haven’t seen eye-to-eye on policy over the past year. But, as the LPL strategists note, that may be changing. At a recent policy meeting, the Fed announced it would be much more patient with future rate hikes. That could remove one of the big uncertainties for investors.
Finally, the S&P 500 bounced nearly 15% off the December 24 lows. The next 10% could be much tougher. There has been significant stock participation, and stocks are still cheap relative to bonds. There have also been solid earnings. This all suggests potential new highs in stocks could happen later this year. In the words of LPL strategists, however, it just won’t be an easy ride.
Things are off to a good start overall, but it’s early. Financial companies have benefited from improved net interest margins on loans and a pickup in loan growth.
However, the fourth quarter was challenging for the capital markets, leading to mixed results. Tariffs and slower growth in China and Europe remain key risks. Expectations for earnings have been lowered, but that could be setting up a likely upside surprise.
Looking ahead, the LPL strategists see solid 6-7% earnings gains to $172.50 per share in S&P 500 earnings. That could support double-digit stock market gains this year. Earnings growth is slowing, primarily because of the anniversary of the December 2017 tax cuts. Nonetheless, a slowdown and contraction are two very different things.
Recently more than 70% of the S&P 500 components made a new 4-week high, the highest level since late 2011. Historically, this type of rare strength can lead to strong outperformance in equities and likely means the December 2018 lows won’t be tested.
For a more in-depth review of these topics, tune in to this week’s Market Signal podcast. Don’t miss an episode. Subscribe to the Market Signals podcast series on iTunes, Google Play, Spotify, or wherever you get your podcasts.
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