What's Powering January's Market Rally?

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On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Sophie Antal Gilbert, head of AIS business solutions, discussed the recent rally in equity markets, developments on the Brexit front and the impact of the U.S.-China trade war on consumer and business sentiment.

Markets on the rise, but declining consumer sentiment signals caution

After a brutal December for markets that saw the S&P 500® Index come within two-tenths of a percentage point of a bear market on Christmas Eve, equities have rallied significantly during the first half of January. The S&P 500, Ristuben said, is up roughly 12% from its Dec. 24 bottom, including an approximate 3% climb the week of Jan. 14 alone (as of midday Jan. 18). The STOXX® Europe 600 Index also rose nearly 3% from Jan. 14-18, with the MSCI Emerging Markets Index advancing roughly 1%. Why?

"One of the worries that helped spark the fourth-quarter selloff was that a recession may be lurking in 2019--a scenario which has never looked likely to our team of strategists at Russell Investments," Ristuben said. This month's market gains, he noted, are likely indicative of a broader realization that the economic outlook for 2019 isn't as pessimistic as originally feared by some. "This is in line with our thinking--that 2020, and not 2019, is when a U.S. recession is more likely," he stated.

That said, in Ristuben's opinion, the all-clear sign for markets has not been raised. Plunging consumer sentiment in the U.S., as evidenced by the latest data from the University of Michigan, is becoming a problem, Ristuben said. "While there are many possible factors contributing to this slump in confidence--including the ongoing trade conflict between the U.S. and China, Brexit and the current partial government shutdown in the U.S.--the fact of the matter is that when everyone starts acting like something bad is going to happen, markets take note and often react in a similarly negative fashion," he explained.

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