by Connor Darrell
CFA, Assistant Vice President – Head of Investments
Perceived progress in the ongoing trade negotiations between the U.S. and China seemed to keep an aura of optimism around equity trading last week, with developed markets equities (as measured by the S&P 500 and the MSCI EAFE indexes) inching higher. Bond yields also moved higher, with the 10-Year Treasury yield reaching its highest level in a month.
After a long delay related to the government shutdown, Q4 U.S. GDP was reported last week. The data showed that the U.S. economy grew 2.6%, which was above expectations but still below the trend rate that had been in place for the past two quarters. On the whole, the economy grew at a rate of 2.9% during 2018, up from 2.2% in 2017.
Performance Diverging from Economic Data
The S&P 500 has posted its best two-month start to a year since 1991, even as economic data and corporate earnings have begun to taper off. While not necessarily poor in absolute terms, recently released economic data has been disappointing, with housing starts falling to their lowest level in two years and consumer spending declining precipitously. In the near-term, it is difficult to evaluate to what extent the uncertainty stemming from the government shutdown can be blamed, but thus far the Fed’s reaction (which has been to suggest that patience may be warranted in determining the path of future policy) has been celebrated by markets.
It is likely not a coincidence that the market’s strong start to the year has coincided with a change in tone from the Fed. The expectation in the market is now for the Fed to hold pat for the entirety of 2019, which if recent trends are to be believed, would likely bode well for stocks. But as we observed during the latter half of 2018, sentiment can change very quickly.