"I have too much money invested in sweaters" Bob Hope

The hope that the central bankers may once again be underpinning risk assets through monetary policy helped equity markets continue the decent start to the year. The S&P 500 closing the month up almost 7%. A possible minor word of caution, the Russell 2000 index of smaller companies which had been outperforming the larger S&P 500, underperformed in the past five days. The FTSE 100 had the best performance of the major developed markets in the past five days as Brexit sentiment improved post the weeks activity in parliament. 

Looking back at the first month of the year, after the worst December for the S&P 500 since 1931, January was one of the best starts of the year for that index on record. A combination of factors helping indexes recover from December. Sentiment indicators suggested that investors were throwing in the towel at the start of the year, always the portent for a rally. Central bankers from all the major developed economies of the world eased monetary conditions with a combination of words and or actions. We are now roughly halfway through the US earnings season, and the blended earnings growth rate for the S&P 500 is 12.4%, according to Factset. Finally, hope that there will be a solution to the trade war tensions between China and the US.

The more economically sensitive sectors have been the best performers at the start of the year. Energy, after the recovery in the oil price. Industrials after poor December and financials boosted by a decent set of earnings reports. Utilities and staples two of the weaker sector performance, both sectors less sensitive to changes in economic sentiment.

February has historically been one of the weaker months of the year; it may prove so again this year after such a strong start in the US. The swing factor aside from China trade talks could be how the Fed reacts if the equity market does continue its early strength. There is little doubt that some of the recent change in the Federal Reserve’s rhetoric is down to the sharp correction in December. A continued recovery could turn the Fed more hawkish again. Some analysts now think we are reaching the peak of the US interest rate cycle.

Looking to the week ahead, company earnings will continue to focus investors minds. Other events that could influence sentiment will be the Purchasing Manager Surveys around the globe. In particular the US Institute for Supply Management services PMI. The Bank of England meets this week; there is no expectation of a change from the Bank. It will also be interesting to see how the market reacts if we do receive further weak economic data. Are we back to bad economic news being good news for risk assets?

Posted on February 3, 2019 .