Economic and Stock Market Commentary for the week of January 29, 2019

Alex Ralicki |

The economy is stumbling out of the gate this year, with the painful government shutdown, a sudden drop in existing home sales, and a marked downturn in consumer sentiment behind much of this early 2019 slowdown. Of course, the big story is the shutdown. It was well into its second month and subtracting more than 0.1% from GDP each week when a three-week truce for the government to reopen appeared likely to go into effect as we went to press. So, even without a material weather impact, first-quarter GDP, once forecast to increase by 2%, or more, may now show somewhat less improvement.

Some relief could be on the way. First, there’s the Federal Reserve. Earlier, it said several interest-rate hikes might be forthcoming this year. Now, it is suggesting a more patient approach. (Note: The Fed was to have met after this report went to press; no rate increase was expected at that time.) Also, China and the United States appear to be making some progress toward reaching a trade deal. So, once the shutdown ends permanently, GDP growth may move back into the 2.0%-2.5% range. Meantime.

Earnings season is living up to expectations, with many more positive than negative surprises. In all, more than 70% of the companies reporting so far have exceeded earnings forecasts for the recent fourth quarter. In all, expectations are that earnings will show a 10%, or so, gain for the quarter. True, that would be a smaller rise than in recent periods. But it still would be respectable given the advanced age of the business upturn.

Meanwhile, the bulls are back, as they are pushing stocks higher once again after a sharp selloff late last year. At that time, worries about high P/E ratios, slowing earnings growth in 2019, and rising interest rates took much of the bloom off of the investment rose.

Clearly, a calm hand on the wheel is proving to be a good policy, especially as the bull market continues to evidence impressive staying power. Now, with cautious optimism developing on the trade and government shutdown fronts, and with a suddenly more patient Fed back in the picture, equities could be poised for further gains.

Conclusion: We think investors are best served by emphasizing stocks with steady earnings growth, strong financials, and rising dividends backed by secure payouts.