foxex: Rally On

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. Markets continue to rally as trade hopes brighten

Markets Close

Dow
23,531.35 +0.42%

S&P
2,549.69 +0.70%

Nasdaq
6,823.47 +1.26%

VIX
21.36 -0.09%

INV Anxiety Index
104.48 High Anxiety

US 10-Yr Yield
2.682 +0.86%

Rally on despite global risks

A solid rally across all major markets today kicked off the first 'real' week of trading for 2019. We picked up where we left off on Friday, when stocks were on a blistering tear following a much better than expected jobs report and hints from the Federal Reserve that it will approach interest rates cautiously this year.

Remember -- The Fed is really focused on two things: Keeping unemployment low and inflation in or around the 2% range. So far so good. There has even been talk from some Fed Governors and Fed watchers that it may not raise rates at all in 2019 and might consider a rate cut! The Fed meets next on January 20th, and there is less than a 2 percent chance it will raise the overnight lending rate at that meeting, according to FedWatch.

This week also kicks off formal trade negotiations between the U.S. and China. The rhetoric from both sides has been fairly positive of late, which is expected given the volatility in global markets. Apple's lowering of its revenue projections last week due to lack of demand from China and uncertainty about the trade issue is the most obvious example of how the trade war is impacting business. But there are thousands of more stories like that with manufacturers, farmers and small businesses in both China and the U.S. that we will never hear about. Apple can handle a $9 billion revenue shortfall. A small business that supports 9 employees cannot.

Unfortunately, the U.S. government remains in partial shutdown - the third longest in history - and there are no signs of a breakthrough on the horizon. That means we will not get fresh data on the U.S. - China trade gap, since the agency that tracks those figures is furloughed. The last read of that gap showed a $344 billion gap between the U.S. and China for the 10 months ending October 2018. Zoom into the chart below from the Census Bureau for the month by month breakdown.

Why it Matters:

The trade war and the dysfunction in Washington are both weighing on markets. Friday is pay day for federal employees, and about 800,000 of them in the U.S. may miss that paycheck if the shutdown isn't resolved. We haven't really felt the impact of the shutdown to date since this is the first full week of work since the holidays, but we will.

Global Risks:

The trade war and political dysfunction are but two of the 12 global risks that the Eurasia Group has identified for 2019. The Eurasia Group is a non-partisan think tank run by global economists who counsel investors and companies on strategy. Even if you don't agree with their thesis, their reports will make you smarter. I'll link to their 2019 report here, but here are the 12 global risks they have identified:

Bad Seeds (Lack of cooperation between governments and dysfunction within governments)
U.S. China Relations
Cyber warfare
European Populism
U.S. Domestic Policy
Innovation Winter (The lack of technological innovation due to political will and human capital)
Coalition of the Unwilling (The end of the U.S. led liberal world order)
Mexico (Newly elected President Andres Manuel Lopez Obrador has his hands full with more domestic violence and an unfriendly neighbor to the North that wants it to pay for a wall.
Ukraine - The territory battles with Russia will continue
Nigeria - The most hotly contested election in 20 years will test this country and all of Africa.
Brexit
Red Herrings - Brazil, Saudi Arabia, Iran...there are many.

What's Next:

The trade talks are critical, obviously. Expect to hear more about progress from both sides as the meetings commence later today. As for Brexit, Prime Minister May faces a crucial parliamentary vote week on key aspects of the plan to leave the E.U. She faces a lot of opposition in Parliament, but has managed to hang on through several votes and departures from her cabinet. It will get more difficult for May as the deadline of March 29th approaches, but she has been resilient.

Here in the U.S. it's a relatively quiet week for economic data, which is a good thing since several key branches of the government are closed down. President Trump faces a Democratic majority that will not budge on his request to fund a border wall, and he won't back down from that demand. This could go on for awhile. We will get a read on consumer spending at the end of the week. Those are backward looking, but if the consumer was feeling strong in December despite the selloff, that's a good sign for the markets.

Friday's rally and the strong momentum today show that investors are also resilient, despite the multiple risks on many fronts.

In other news...

Seven Key Issues to Determine Success of U.S.-China Trade Talks (Bloomberg)

We may hear about negotiations going well. But these are the most important things on the table, more specifically.

Sony's Chief Plans to Make Entertainment Assets a Priority (NYT)

A shrewd pivot? Perhaps. Netflix probably isn't super into it.

Amazon is now the most valuable public company (CNBC)

If we learned anything from Apple's $1T balloon popping, it's that this is not the most important thing to pay attention to. Still, CNBC gives you 5 reasons it's Amazon and not someone else.

Trump Has Promised to Bring Jobs Back. His Tariffs Threaten to Send Them Away. (NYT)

This, plus tax refund uncertainty, plus federal workers missing their paychecks this Friday. There's a lot going on.

Chart of the Day: Stocks Rebounding From Lows by Double Digits

Since the market plunge of late 2018 tentatively began to recover on December 26, the S&P 500 has rebounded an impressive 8%. Helping to lead the way in this substantial bounce have been surging large caps that were previously under heavy pressure along with the entire market.

Even the most battered stocks of late, including both General Electric and DISH network, have been able to rebound by a sizable 26% and 19%, respectively, since late December. Leading the pack has been Netflix, which has rallied by leaps and bounds since the December 24 market close. Since then, the stock is up a whopping 34% in two weeks' time.

While these double-digit returns may not necessarily be a harbinger of what's to come with the overall market, it's heartening to see that some of the most pressured stocks in recent months have begun the new year with a strongly bullish bias.