Markets gained for the fourth consecutive week, notching the biggest four-week gain since October 2011. Investors took heart from upbeat 4Q18 earnings, signs trade tensions were easing and reduced fears of economic slowdown. Federal Reserve officials offered further reassurances that the central bank’s monetary policy would be flexible depending on the economy’s performance.
As investors’ risk appetite increased, demand rose for corporate bonds, and credit yield spreads began to tighten. Demand for U.S. Treasurys diminished and government securities saw yields rise. The 10-year Treasury yield climbed for the week, ending at about 2.79%. For the week, oil prices were up and gold prices were down. The U.S. dollar gained slightly against a basket of currencies.
With 11% of S&P 500 companies reporting fourth-quarter results, 76% have exceeded earnings per share (EPS) expectations, while 56% have beaten sales expectations. As of January 18, 2019, FactSet estimated the S&P 500 index’s fourth-quarter earnings growth rate at 10.6% and its 12-month forward P/E ratio at 15.3, below the five-year average of 16.4 but above its ten-year average of 14.6. Bank of America, Goldman Sachs and United Airlines impressed this week, whereas Alcoa, Netflix and Morgan Stanley disappointed.
Preliminary University of Michigan Consumer Sentiment for January fell 7.6 points to 90.7 (est. 96.7). The report noted the headline index was at its lowest level since October 2016. The year-ahead outlook was the worst since mid-2014, citing the government shutdown, tariffs, financial market instability, global slowdown and a lack of clarity around monetary policy.
January’s Philadelphia Fed manufacturing index came in at 17.0 vs. consensus for 10.0 and December’s 9.1. New orders were strong at 21.3 (the highest reading in six months) vs. the prior month’s 13.3 level. The report contrasted with weaker Fed manufacturing surveys, such as the New York Fed’s Empire survey, which hit its lowest level since mid-2017 this week.
The latest Fed Beige Book reported eight of twelve Fed districts were seeing modest to moderate growth. Manufacturing continued to expand, though the pace of growth slowed, particularly in the auto and energy sectors.