The Early Year Market Rebound of 2019

Last Christmas did not feel like a time for joy for many investors, who found themselves perplexed and shocked at the abrupt market volatility. It was not the gift they were expecting.

A number of factors are thought to have left investors jittery the end of last year, among them; the Federal Reserve’s hawkish tone and the prospect of several interest rate hikes in 2019; concerns about trade talks as well as concerns with some FAANG stocks. These issues and others introduced some spectacular volatility into the markets that had prognosticators wondering about the new year.

Had the long-running bull market really come to an end?

Despite this volatility, stocks bounced back in the new year, and through the second week in February, the S & P 500 was up more than 16 percent. By February 22, the Dow had broken through the 26,000 mark for the first time since last November. That capped nine weeks in a row of gains, a record going back 24 years.

The Russell 2000 also saw impressive gains since the start of the year, with the small cap index showing its longest weekly winning streak since the mid-90s as well.

Different Factors can Invite Volatility

Different Factors can Invite Volatility With the bounce in the first weeks of 2019, stock analysts and chief investment strategists are singing a slightly different tune than in past years. They are cautiously optimistic, but foresee more volatility and less upside than we have seen during the rally.

There are currently a couple of positive developments that have spurred the recent rally. The Fed’s more dovish tone has helped stimulate the market. The market has reacted favorably to the Fed’s more conciliatory tone. Ironically, the Fed has reacted to their own influence on the markets.

Maybe inflation rates could rise later in the year, which might force the Fed’s hand and return to a raising rates environment. For now, the Fed is comfortable with the rate of inflation.

A deal with China may be priced into the market already or it might stimulate the market further. This is hard to say, but any good news on this front has been welcome news to the market and its direction. Also, some analysts believe that the recent rally has produced overbought conditions and that the trajectory cannot continue.

Since tariffs were imposed by the U.S., the Chinese economy has been impacted negatively. A solid deal could be good for the global economy.

Conversely, there are some analysts who believe that we could retest those December lows and question why the Earnings growth in the fourth quarter of 2018 were quite good. Nearly three-quarters of S&P 500 companies reported earnings that beat forecasts. The earnings growth rate for those companies saw a growth rate of 13.3 percent. Facebook was one of the big names that beat expectations, both in earnings and revenues. A break down of sectors saw communication services companies, industrials and information technology companies among the most likely to report above estimate earnings. Utilities and real estate companies were least likely to have beaten estimates. Q4 2018 Earnings and What is Expected in 2019 Fed has changed its stance. Could it be that rising wages could be a precursor of higher inflation? And what will the effect of potential tariffs be on Europe and Japan?

A slowing global economy will also have some impact on investor’s returns this year compared with last. So, while the rally in the first months of this year has steadied some nerves and made up for the “Christmas surprise,” the expectation of volatility in this new year may be the gift that keeps on giving.