Market Monitor: January Mid-Month Update

Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.

Headlines and Highlights
  • Government shutdown mired in stalemate after nearly a month: The partial government shutdown became the longest in U.S. history and reached Day 27 with no sign of a resolution. About a quarter of the federal government and 800,000 employees are affected by the closure, the result of an impasse between President Donald Trump and congressional Democrats over Trump’s request for $5.7 billion to build a wall on the U.S.-Mexico border. The impact on the economy and markets so far has been muted.
  • Markets rally to start the year: A resurgence of investor optimism sent stocks, REITs and commodities sharply higher in the first half of January in a market-wide rebound from December’s harsh sell-off. Markets turned higher on signs the Federal Reserve may shelve further interest-rate increases as well as on optimism about U.S.-China trade war talks. Since reaching their nadir on Christmas Eve, U.S. stocks have posted double-digit percentage gains with international stocks just behind them.
  • Brexit chaos intensifies after Parliament’s historic ‘no’ vote: Britain’s planned exit from the European Union stands in extreme disarray after Parliament resoundingly rejected Prime Minister Theresa May’s deal with the EU on Brexit terms. May survived a no-confidence vote but the Brexit outcome remained unclear, with possibilities ranging from a hard exit (no agreement) to a second referendum. Barring a postponement, Britain exits the bloc March 29th.
Chart of Interest

market monitor

Bounce-back: U.S. stocks in the last three weeks have recouped half their losses from the prior three months and were down 10.4% from the September all-time high at mid-month. International stocks have regained about a third and were down 10.1% from their peak.

 Source: Morningstar, Altair Advisers
Our Views
  • Valuations are more attractive than they were before the fourth-quarter sell-off, which reaffirms our positive outlook for both U.S. and non-U.S. stocks. Major markets now trade at discounts to their historical norms: The S&P 500 has a trailing price-earnings ratio of 17.2 versus its five-year median of 19.4, international developed stocks (EAFE index) have a P/E of 12.4 compared to a median of 16.1, and emerging markets’ (EEM index) P/E is 11.2, below the median of 13.1.
  • The government shutdown does not appear to pose an immediate threat to markets or the U.S. economy aside from a likely blip in first-quarter GDP. We would be concerned if weeks stretch into months without a resolution, as a lengthy shutdown risks eroding consumer spending, business confidence and company earnings.
  • British Parliament’s resounding rejection of the government’s proposed Brexit deal could be a blessing in disguise for markets. While Britain could still crash out of the European Union with no terms agreed to, analysts saw the vote as increasing chances for either a “softer” exit – one more favorable for trade and the British economy – or a second referendum that could ultimately mean no Brexit at all.
  • The trade war remains the primary market risk in early 2019. We expect a framework for a deal will be established in the coming months. In the meantime, the resilient U.S. economy has enabled markets to regain some of their lost momentum and underpins our positive outlook going forward.
  • Fed Chairman Jerome Powell’s comment that officials are “listening carefully” to the financial markets removed a near-term worry for markets: the fear that more rate hikes were coming soon. Given other political and economic uncertainties, however, we expect bouts of volatility like those that jolted markets last year to recur periodically in the first half of 2019.

The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice.