Can the Latest Rally Continue? Investors Look to Earnings for the Answer

The rally in U.S. equities that began on the day after Christmas continued last week, as the S&P 500 climbed 2.5 percent, bringing the total for the rebound to 10.4 percent. Stocks have risen on nine of the twelve trading days throughout this period. Each of the eleven sectors in the index has advanced, but it has been cyclical groups that have led the way, including energy, consumer discretionary, communication services, industrials and technology.

In Defense of Diversification

Diversification is a time-tested, foundational principle of wealth management. Reduced portfolio volatility and downside loss mitigation are bedrock principles of its value. Yet the further removed we get from the type of market conditions in which diversification reveals its value, the more likely we are to question it. We see this pattern of belief, skepticism and abandonment repeated time and again over market cycles. It seemed that we had, once again, arrived at one of those moments towards the end of last year’s third quarter, just before the start of the recent selloff in stocks. But the severity and speed of the market decline in last year’s fourth quarter seem to have restored some faith in the wisdom of diversification. 

Investors Embrace Some Good News

The bounce in U.S. equities off the Christmas Eve low now amounts to an impressive 7.7 percent, although the move has certainly been vertiginous, as a 2.5 percent down day in the S&P 500 last Thursday was followed by an almost 3.5 percent gain on Friday. But at week’s end, stocks had climbed 1.9 percent. The big move on Friday came after Federal Reserve Chairman Powell said the Fed would be patient in normalizing monetary policy, temporarily relieving the anxiety of the more skittish Fed watchers.

Take a Hike, 2018

In fact, take four hikes. And with that, the Federal Reserve took its parting shot at 2018 and went home for the year, presumably not to be heard from at all in the new year, if markets are to be believed. We are not so sure. Expecting economic growth to remain above trend in 2019, we think the Fed will be back in the picture for 2019, taking two more rate hike shots at investor expectations.

Market Turmoil Leaves Investors Wondering What’s Next?

The rout in equities accelerated last week. The S&P 500 shed 7.1 percent, its worst week since August 2011. The index is now lower by 9.6 percent on the year and down 17.5 percent from its September 20 closing high, just shy of the 20 percent decline that defines a bear market, although that comes as small comfort. The Nasdaq Composite index is now in a bear market, down 21.9 percent from its August 29 high after falling 8.4 percent last week. And the small cap Russell 2000 is now down 25.8 percent after dropping 8.4 percent last week.