January Market Review: Fed Shifts Tone & Trade Optimism Fuel Gains

January finished strong, as dovish comments from the Fed and encouraging signs on trade with China boosted spirits. Fed Chairman Powell changed tune from last year by not only saying the central bank will be “patient” with rate increases but will also be flexible on moves to reduce the balance sheet. Stocks rose and the dollar fell as a result. Meanwhile, the US economy continued adding jobs even in through the government shutdown.

Weekly Returns

S&P 500: 2,707 (+1.6%)
FTSE All-World ex-US (VEU): (+0.8%)
US 10 Year Treasury Yield: 2.68% (-0.06)
Gold: $1,318 (+0.7%)
EUR/USD: $1.146 (-0.4%)

Major Events

• Monday – The US issued sanctions against Venezuela’s state owned oil company in an effort to encourage regime change away from President Maduro.
• Monday – Nancy Pelosi invited President Trump to give the State of the Union address on February 5, a week after initially scheduled.
• Tuesday – PG&E declared bankruptcy stemming from liabilities in its role in California wildfires.
• Wednesday – The Fed left rates unchanged and signaled they will be patient with future increases. Stocks rallied.
• Wednesday – Facebook reported record earnings in the face of a string of controversies. Shares rose 12%.
• Thursday – China and the US said negotiations were progressing and suggested that Presidents Trump and Xi would meet in the coming weeks
• Friday – The US added 304,000 jobs, beating expectations despite the government shutdown.

Our Take

Declines in the fourth quarter were largely attributed to fears around trade conflict with China, rising interest rates, and shaky earnings. January went three-for-three on these items, and the market rallied accordingly.

US-China trade talks have seemingly progressed in a positive direction, though no breakthroughs have been announced. The Fed kept rates on hold and signaled increased “patience” around further hikes. And earnings season saw hits and misses, but on balance has been better than some feared.

So it is logical that stocks turned in their best January in over 30 years. But we would note that most of the gains were a snap-back from hurried selling in December and none of the core issues are quite resolved. People usually only equate losses with volatility, but technically big up months are also volatile, just in a more pleasant fashion.

There should be new news on trade in the coming weeks. The Fed is effectively on hold through the spring and maybe longer and earnings season is starting to wind down, but will be back before you know it. As such, investors should not be surprised by more big months in either direction.