THE MONTH IN BRIEF
During a month marked by political impasses in the United States and United Kingdom, equities performed well around most of the world. On Wall Street, the S&P 500 advanced 7.87% in January, with a new earnings season as well as trade and monetary policy developments providing tailwinds. Most of the economic data that rolled in was good; the partial federal government shutdown may have negatively impacted some of the numbers. Home sales fell off abruptly. Many commodities advanced. All in all, investors focused on the potential of the markets more than disputes.1
DOMESTIC ECONOMIC HEALTH
The Congressional Budget Office believes that the 35-day federal government shutdown cost the economy about $11 billion. The silver lining is that roughly $8 billion of that loss is potentially recoverable, presuming federal spending and consumer spending bounce back in the coming months.2
Due to the length and breadth of the shutdown, a few key economic reports did not appear last month. Nevertheless, there were plenty of attention-getting news items.
As expected, the Federal Reserve left interest rates alone in January. What really intrigued investors was the dovish tone of the Fed’s latest policy statement. It noted that the Federal Open Market Committee would be “patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate” for the economy. The central bank appeared newly cautious: language implying that rate hikes might be merited was now absent.3
In mid-January, China made a move in the U.S.-China trade dispute. It offered a plan to address the U.S. trade deficit, with an objective of cutting it to $0 by 2024. China would undertake a strategy to buy greater amounts of American goods: $45 billion more during 2019, and gradually, more in each of the following five years, with the multiyear increase reaching $1 trillion. Bloomberg News reported that U.S. negotiators wanted China to try and wipe out the trade imbalance within two years, not six. American demand for Chinese-made products is so strong, however, that making any real dent in the trade deficit might be a tall order, given current free market conditions.4
DOMESTIC ECONOMIC HEALTH
While the Federal Reserve certainly pays attention to Wall Street’s mood, it adjusts its monetary policy in respect to the economy, not the preferences of market participants. In December, the central bank did not exactly tell investors what they wanted to hear. Following the announcement of another quarter-point rate hike (the target range is now 2.25-2.5%), Fed chair Jerome Powell stated that monetary policy “does not need to be accommodative,” and affirmed that the Fed would continue to remove up to $50 billion per month of Treasury and mortgage-backed securities from its balance sheet. According to the latest Fed dot-plot, there would be no pause in tightening: two rate hikes were still envisioned for 2019. Major indices fell sharply after Powell’s remarks.2
To justify its stance, the Fed could point to a number of economic indicators. The manufacturing and service sectors were seeing considerable expansion, by the look of the Institute for Supply Management’s November purchasing manager indices. ISM’s non-manufacturing PMI rose 0.4 points to 60.7, and its factory PMI climbed 1.6 points to 59.3; these were great readings. (Additionally, the Federal Reserve said that industrial production rose 0.6% in November.) Department of Commerce data showed personal spending up 0.4% in October and retail sales advancing a decent 0.2%. Consumer confidence remained high. The University of Michigan’s index finished December at 98.3, higher than its final November mark of 97.5. The Conference Board’s monthly gauge came in at 128.1 – notably below its (revised) November reading of 136.4, but still at an impressive level.3,4
