Setting Up For A First Quarter Market Low

Moribund Manufacturing data and slower growth guidance by Apple have exacerbated growing fears of recession, sending stocks plunging 3% on January 3rd. However, exceptionally strong job growth and dovish support from Fed Chair Powell the next day sent stocks soaring 4%. Making sense of the frequent news-driven volatility is challenging, especially with the remaining major uncertainty of trade wars and Brexit nearing a climax.

Since our Federal reserve relayed to investors on October 3rd they would hike rates sharply despite a slowing global economy, there have been no catalysts to keep equity valuations from depreciating. Suddenly, on January 4th, despite exceptionally strong jobs data, our Federal Reserve implied no more rate hikes were likely until inflation and GDP growth accelerates.

With stocks having sold off roughly 20% from their October peak, the market has already priced in some global weakness as well as slower earnings and GDP growth in the US. While uncertainty remains, we continue to forecast a 1st quarter of 2019 low and new leg higher by the summer in stocks.

Strength in the US

While some leading indicator indices forecast slower growth ahead, the current picture continues to be exceptionally strong with consumers leading the way.

Near full employment and more rapidly rising wages in a very tight labor market have allowed the Service sector to sustain strong growth with same store sales expanding at a record rate. The excellent demand for workers is still robust in many sectors with the closely watched manufacturing employment reaching new 10-year highs.

With strong industrial backlogs and tight supply chains in this labor constrained economy, employers actually need a modest slowing of our economy to reduce overtime and enhance profit margins.

Weakness in the US

Signs of slower growth in the US are marginal with housing, trade wars, manufacturing and junk bonds among the worries.

Housing is weak due to the labor market's inability to create sufficient supply, causing abnormally high prices. This is not the bubble atmosphere of a decade ago when a major surplus of homes existed. Mortgage debt service and default rates are extremely low and home prices should stop rising with the recent declines in interest rates.

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