January brought welcome relief to investors, as a strong labor market, low inflation, and a more patient Fed reminded markets that underlying fundamentals remain strong. During January, the Standard and Poor’s 500 Index experienced a 7.9% rally, its best January return in over 30 years. Small caps as measured by the Russell 2000 Index, posted a double digit 11.2% return. International markets moved higher, as well, with the Global Dow Index returning 7.6%.
While we are about 10% off all-time highs, we do believe that a return to market highs is possible at some point during the year. Positive news from the Fed, progress on China-US trade talks, and the realization that the chances of recession in 2019 are low could be the catalyst. However we do see volatility potentially being more prevalent in 2019. History shows that the market generally follows January’s direction through the remainder of the year. Since 1950, a gain in January has preceded an annual gain 87% of the time.
As we enter February, we are optimistic that Fed Chairman Jerome Powell’s recent hinting that the Fed will take a more wait-and-see approach on rates will serve as a tail-wind to quell volatility in February. However, we are closely eyeing border security negotiations and China trade talks as potential sources of turbulence for the markets. This month marks a deadline on both fronts. Without a deal on border security before February 15th, the government will likely shutdown again and, without progress on China trade talks, the US-China tariff truce will expire at the end of the month.
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