The US equity market rebounded from December’s selloff, marking the best January in thirty years and the best monthly return since October 2015. More dovish Fed talk, solid economic data and better-than-expected earnings drove the market optimism despite uncertainties about the trade talks with China and slower global economic growth.
The Federal Reserve decided to keep interest rates on hold during its policy meeting this week and pledged that future moves will be done patiently and be more data-dependent. “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the Fed statement said.
Q4 Corporate earnings data has been better than expected so far though earnings growth slowed significantly. Among the 22% of companies in the S&P 500 Index reporting results, 71% have beaten earnings estimates and 59% have beaten sales estimates. The blended earnings growth rate for the S&P 500 was 10.9%, according to FactSet. The January employment report showed a 304K increase in total nonfarm payrolls, which surprised most forecasters. The consensus was for 165K new jobs. The ISM Manufacturing Index improved to 56.6. These reports eased some concerns about slow economic growth.
The S&P 500 SPDR ETF (SPY) jumped 8.01%, while the small cap stock ETF (IWM) rallied 11.32%. The emerging market equity ETF (VWO) fared better, up by 9.66% and international equity (EFA) rose 6.63% as well. Gold (GLD) and fixed income asset classes generated positive returns as the Fed became more dovish. The long-term Treasury bond ETF (TLT) moved slightly higher by 0.38% (see Figure 1). Market volatility, as measured by the S&P 500/CBOE option implied volatility, declined to 17.36% on January 31.
All sectors enjoyed significant gains. As equities recovered, the more cyclical sectors outperformed defensive sectors and small cap outperformed large cap. Communication Services (XLC) and industrials (XLI) led the rally, up by 11.75% and 11.43%, respectively. Utilities (XLU) and healthcare (XLV) lagged the index.
Figure 1: Asset Class ETF Performance – January 2019
Figure 2: Equity Sector ETF Returns – January 2019
Data Sources: FactSet.
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