The post-Christmas rally in stocks resumed last week, after a one-week interruption. The S&P 500 rose 1.6 percent, for its fifth gain in the past six weeks, and has risen 15.1 percent since it hit bottom on Christmas Eve. In the process, the S&P 500 has pushed above the 50-day moving average, after spending a month and a half below it. On Friday, it flirted with the 100-day moving average but ended the day fractionally short. It has been almost four months since the index closed above the 100-day moving average. It remains 7.6 percent below its September peak.

Fourth quarter earnings have so far been generally solid. Growth is trending above 12 percent with about half of the index having reported. But estimates for 2019 continue to fall. According to Factset, first quarter earnings are now expected to fall year-over-year by 0.08 percent. That would be the first negative quarter in almost three years. And full-year estimates have declined to just 5.6 percent. Trade tensions, with China in particular, political uncertainty, especially concerning Brexit, and slowing growth around the globe are being blamed.

All of this led to the Federal Reserve taking a decidedly dovish turn last week, just a little over a month after saying the year ahead would likely see two more rate hikes. It did not say that further rate hikes were off the table, but rather indicated that current policy was appropriate. That could change, but the Fed has conceivably already arrived at a level of neutrality and would now have to see compelling evidence to change the target rate, up or down. The Fed also indicated that it would be flexible with the pace of its balance sheet runoff. The Fed’s previously articulated policy was that the runoff was on automatic pilot, adding to concerns that Fed policy was too restrictive and insensitive to signs of slowing growth.

Investors Welcome the Fed’s More Dovish Tone

While investors of all stripes welcomed with relief the Fed’s about face, it did leave some questioning the timing of the shift. When the Fed last met in December, financial markets were plunging. The S&P 500 was down 14 percent from its peak, the Nasdaq was down 18 percent, and high yield spreads had widened by 168 basis points from their early October low. But economic weakness had not yet shown up in the data. The November ISM manufacturing survey was strong, and services were steady. Job growth was solid and consumer confidence was still buoyant. But the data began to deteriorate soon after the Fed meeting, and the government shutdown began three days later.

Consumer confidence weakened noticeably, especially the expectations component. The December ISM manufacturing report slowed, especially the new orders component. Housing activity weakened further, while job growth remained healthy. And reports from Europe and China showed global economic activity continuing to soften. According to the CME FedWatch tool, there is now an 86 percent chance that 2019 ends with no further changes to the Fed funds rate. And in fact, there are now slightly higher odds of a rate cut than a rate hike.

All Eyes on Trade Negotiations and Earnings

With the Fed presumably on hold, although the strong December employment and manufacturing reports may suggest otherwise, the prevailing narrative in the marketplace now is that a successful resolution to the trade negotiations with China remains the last major impediment to higher equity prices. It is presumed that a favorable resolution to the dispute would restore a sense of policy certainty, result in a resumption of more robust trade, and solidify 2019 earnings expectations. Even European Central Bank (ECB) President Draghi looked to China for relief last week, saying that Chinese economic stimulus would help support activity in the Eurozone, where he said, risks had moved to the downside.

The chances of a market-friendly outcome to the current talks remain unclear. There have been some hints that offer modest encouragement. Both sides have said they believe progress is being made. Last week, China raised its target for U.S. soybean imports, and there was talk of a Trump-Xi summit later in the month. A month remains for the two sides to reach some conclusion, ranging from agreeing to a comprehensive deal by March, extending the talks if progress is being made, or end the negotiations if progress is not being made and turn up the heat in the trade war. If the prevailing market narrative is accurate, the stakes are high.

An even tighter negotiating window confronts the congressional committee trying to craft an immigration bill to keep the government from shutting down again. Their time runs out on February 15 less than two weeks away.

Earnings season continues this week, with a full 20 percent of the S&P 500 reporting, including Alphabet, GM, and Disney. And, the president is scheduled to deliver his State of the Union Address on Tuesday.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

Past performance is not a guarantee of future results.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The ISM manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.

The CME FedWatch Tool analyzes the probability of FOMC rate moves for upcoming meetings. Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market’s views on the likelihood of changes in U.S. monetary policy, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date. The tool also shows the Fed’s “Dot Plot,” which reflects FOMC members’ expectations for the Fed target rate over time.