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The January Effect in Action

After a difficult fourth quarter last year, US equities bounced back strongly to start 2019. The S&P 500 rose 8%, its best January performance since 1987, as all eleven S&P sectors saw gains. Since hitting a recent bottom on Christmas Eve, US stocks have risen approximately 15%.

The market strength was not just isolated to US large caps. For the month, domestic small caps rose a very strong 11%, and internationally, developed and emerging markets enjoyed gains of 8% and 9%, respectively.

Our Perspective
The end of 2018 was challenging as markets digested negative news on earnings expectations, trade tensions, and monetary policy. During January, these key risks appear to have temporarily eased.

We believe volatility (potentially in each direction) is likely to continue to rise, and we view the current investment climate as very fast moving and dynamic. In this type of market environment, an actively managed investment approach can be a key tool to manage risk and meet financial goals.

Decent Earnings Buoy Markets

In January, investors turned their attention to the kickoff of earnings season, and profits have been okay. With 41% of S&P 500 companies having reported quarterly results at the end of the month, earnings are on track to rise almost 12%.

Our Perspective
Fears of disappointing 2019 economic growth was a key driver of the volatile fourth quarter. While growth may still disappoint – after all, we are only one month into the year – early earnings results suggest that the most dismal economic predictions from late last year were most likely an overreaction.

Although we do believe that the US economy is closer to the end of its economic cycle than the beginning, our indicators do not yet suggest that a recession is imminent.

US and China Seek Trade Resolution

Recent remarks from President Trump, the White House administration, and other key government officials appear to indicate a growing eagerness to find a compromise to US-China trade relations. Escalating tariffs between the US and China has been a major factor weighing on financial markets over the past year.

Our Perspective
Decades of strong growth has led China to become an economic powerhouse, and it is in the best interest of both the US and China to have a collaborative relationship. In the short run, resolving key issues such as intellectual property theft may de-escalate the relationship, but over the long run, this economic rivalry is likely to go on for many years across many issues.

Rate Hikes May Take a Break

Late last year, comments from the Fed sparked considerable investor angst. Investors began to fear that policymakers would raise rates too quickly, choke off economic growth, and drive the US economy into a recession.

This month, the Fed changed its language, telling investors that their tightening plans weren’t on autopilot, that they were willing to be “patient,” and that they will ensure the monetary system retains “ample” reserves.

Our Perspective
The central bank raised its benchmark interest rate four times in 2018, and we expect them to continue to look to gradually raise rates as economic conditions allow, while remaining sensitive to global market conditions.

Our View
Economic Cycle		Recent developments argue that stocks and bonds are in a high-risk period both domestically and abroad; US economy is moving later cycle and progressing down the path of a normal economic cycle; internationally, position in the cycle varies by country/region
Growth		Today’s risk profile for economic growth is skewed to the downside; US is approaching a period of peak growth and any further growth above long-run potential should lead to inflation
Inflation		Recent oil price weakness is weighing on near-term inflation expectations; long-term, late cycle inflation pressures remain contained by demographics, fiscal policy/tax reform, ‘Amazon effect,’ and global debt levels
Interest Rates		Tightening monetary policy across the globe supports interest rates moving higher long-term; future Fed policy decisions depend on evolving financial conditions, but we still expected at least one rate hike this year versus the market’s view of zero; expect the yield curve to continue flattening
Key Risks		A number of key global risks remain prevalent and include: decelerating global growth, trade tensions, China’s economic slowdown, geopolitical uncertainty, rising costs (e.g., wages), and high corporate debt levels
Equities		Outlook for US and global equities is improved but still modest; valuations are no longer a headwind; favor higher quality businesses, reasonably priced growth companies, and businesses with fewer embedded late cycle risks (e.g., leverage)
Fixed Income		Corporate bonds continue to adequately compensate investors on a fundamental basis; neutral US Treasury valuations; finding shorter-dated, high quality asset-backed securities attractive (credit cards and autos); prefer a modest duration and barbell maturity structure

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Analysis: Manning & Napier Advisors, LLC (Manning & Napier). Manning & Napier is governed under the Securities and Exchange Commission as an Investment Advisor under the Investment Advisers Act of 1940.

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