What Awaits Us in February

January is a month to remember with DJIA rising to 7.17%, the biggest January gain in 30 years and the largest one month gain since 2015. S&P 500 rose up by 7.8% too, the highest monthly gain since Oct. 2015 and the best January since 1987.

Crude oil did fare well too and the Bureau of Labor’s report on employment amazed us too with the US adding 304000 jobs in January despite the shutdown. Below is the chart from the Bureau of Labor Statistics:

The stocks also rebounded in January but we must proceed to February with caution since the apparent risks are still at bay and can be felt more this month.

The slowdown of the global economy

It is no secret that the economy is slowing down worldwide. There could be several factors, but most notable is the current trade war between the US and China. This dispute and the country’s debt bubble contributed largely to China’s economic decline. Their retail sales are at its lowest since 2003 with barely 5% increase while their automobile industry is crashing at 13%. To add salt to injury, the US prosecution accused Huawei, China’s largest telecommunication company, of selling equipment which could have been used by the Chinese government on spying and of bank fraud. Below is a chart from Statista showing a slowing GDP growth rate of China from a strong 9.5% in 2011:

Hopefully, the positive turn of events in recent trade talks between the US and China will help both countries.

In the US, 2018 GDP reached 3.5% but is expected to slow down to 2.5% according to the recent forecast released by Federal Reserve on a meeting held last Dec. 19, 2018. Below is the quarterly GDP of the US in recent years:

The government’s partial shutdown which lasted for about 3 weeks did little impact on its economic growth as we can see above where there have been more hiring this January 2019 than in previous months but another shutdown we can see in the horizon may finally have an impact. There are also rumors of an impending recession which can be felt late in 2019 or early 2020. The inverted yield curve, quantitative tightening, the fading impact of the tax cuts and the S&P 500 historical bear markets from Pension Partners may lead to an assumption by some that we may as well hit another recession since 2008.

Europe

The fourth biggest in the economy in Europe, Italy, is now on recession with a high unemployment rate and a huge debt amounting to $2.6 trillion.

In France, for the 12th consecutive weekend, the “Gillet Jaunes” or the yellow vest protesters as what they are more popularly known marched through Paris and other cities last Feb. 2. The protests came after the court ruled last Feb. 1 Friday that the police can still use rubber-ball launchers against the protesters. Jerome Rodrigues, one of the yellow vests prominent leader was hit by these flash balls last January 26 and was badly injured as seen in the picture below:

The outcry against the planned rise in fuel taxes began on Nov. 17, 2018, this planned fuel tax hike will spur another increase in fuel on top of the 20% increase earlier in the year of 2018. These rallies led to a suspension of the projected hike last Dec. 4, 2018, and were later totally scraped off the plan in Dec. 6, 2018 but the protests did not stop. According to them, it is also a protest against inequalities and social injustice. They further demanded a redistribution of wealth as well as the increase in salaries, pensions, social security payments, and the minimum wage. The country’s stock market has been hit by this series of events and though it went up last January, who knows what will happen next because of this growing unrest in the land.

And last but the largest issue as of the moment in EU is the Brexit, the global economists are watching the markets warily as the Brexit deadlock nears. A possibility of a “no deal” scenario is now taking shape blurred as it is but still viable with the U.K. Parliament now sending conflicting messages when the majority said that they would not support “no deal” but the similar majority also voted to change the existing Withdrawal Agreement that Prime Minister Theresa May agreed with the EU last year. Below is the EU annual GDP growth rate from tradingeconomics:

source: tradingeconomics.com

Interest Rates

In the last January 30 FOMC meeting, they announced that the overnight rate will remain flat citing the slowing global economy and volatility in the financial markets as its main reason why they have not increased the rates. The current borrowing costs at 2.25% – 2.50% helps borrowing costs, encourage lending, lowers rates for consumers for mortgages, car loans, and credit cards, but it also weakens the dollar, which is critical for manufacturers and exporters.

Corporate Earnings

Almost 46% of the companies listed in the S&P 500 have reported their corporate earnings for Q4, and out of these companies, 70% have reported a positive EPS surprise while 62% reported a positive revenue surprise according to FactSet with an earnings growth of 12.4% in the quarter. For 2019 however, S&P 500 projected to report a year over year decline in earnings for Q1 with the bottom-up EPS estimate by the analysts dropping by 4.1%. The past five years, 10 years and 15 years average bottom-up EPS estimate decline was 1.6%, 1.8%, and 1.7% respectively, meaning the estimate this month is much larger than the 5, 10 and 15-year averages. Because of this downward EPS estimates for the month, S&P 500 projected a small decline at .8% on year-over-year earnings.