The U.S. stock market has rallied nicely off its Christmas Eve low, but it is running into some resistance at the 2600 mark on the S&P 500. 2600-2700 represents breakeven for a lot of investor who came late to the party, so they may be looking to cash out when their loss is gone. Also, earnings season begins late this week. Investors are sure to be hanging on the commentary from CEOs and CFOs as to how demand looks in the first half of the year. Volatility could return.
Emerging markets have done well this year so far, both on the equity (3.7%) and debt (1.4%) sides. Global investors have largely cheered the pullback in the U.S. dollar, which is being hurt by the government shutdown. I would not lean into this because the Brexit situation could easily move to the front pages from a currency standpoint, and China continues to report slowing conditions. Emerging debt may be under-owned right now, and it may have a good year, but expect the path to be very choppy.
Energy has been the leading sector year-to-date with an 8.1% gain. Much of this is a bounce off an absolutely terrible 2H18, which saw oil prices fall from above $75 per barrel to under $50. The root of the problem in energy, that supply exceeds demand such that if any producer cuts production some other producer increases production to fill that demand, doesn’t appear to have changed. Almost certainly energy will not end 2019 in last place again, but I can’t see it being a leader either.
I believe that the U.S. tech sector is unlikely to lead in 2019. This sector, unlike most sectors in the U.S., really is exposed to China. China would very much like not to buy technology from the U.S. where it can get it elsewhere. I am concerned that semiconductor chip stocks reflect the downturn in prices and demand (many have been halved since September), but the rest of the tech sector not so much.
Interest rates have come down quite a bit since September as the global economy has cooled off and the sharp decline in U.S. stocks has investors believing that the Federal Reserve is done raising rates. Maybe, but that doesn’t mean market rates are going to keep going lower. Doubleline’s Jeffrey Gundlach pointed out last Tuesday in his annual market webinar that the budget deficit is exploding at the same time as the Fed is selling bonds back to banks. This means investors are going to have to absorb an increasing supply of debt. That is not a recipe for lower bond yields (unless we actually do get a recession and money comes out of stocks).
Barrons published their annual Roundtable issue this week. If there was one thing the members of the Roundtable agreed upon, it was that the balance sheet of U.S. corporations and the U.S. Government have deteriorated sharply. Investors are focused on earnings, but the quality of those earnings are suspect due to very dubious accounting rules.
Putting my market technician hat on, it would be unusual to see the market try to rally to new highs without first retesting the December 24th lows. Not impossible but unusual. Just keep that in mind if we do get through the 2700 level on the S&P 500 in the next two weeks or so.
-Mark A. Carlton, CFA
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 Source: MSCI Emerging Market Index, Amundi Pioneer Market Monitor 1/11/19
 Source: S&P Energy Index, Amundi Pioneer Market Monitor 1/11/19
 Source: Henry Ellenbogen, Barrons 1/14/19 p.25
 Source: Rupal Bhansali, Barrons 1/14/19 p.24