Stocks rose again this week with developed international and emerging markets having the biggest gains. Good fourth quarter earnings news and comments from the Federal Reserve, that they were likely going to end shrinking their balance sheet, helped fuel the gains.
The FED has been letting $50BN worth of maturing bonds fall off their balance sheet each month. That money is electronically destroyed when this happens. If the FED stops this, they would be buying an additional $50BN worth of bonds a month to replace those that are maturing. Keep in mind that when the FED was expanding its balance sheet, it was buying as much as $85BN of bonds a month. The money to buy the bonds was being created electronically.
On Friday, President Trump announced a deal with Congress to reopen the parts of the federal government that have been shut down until February 15th with the idea that there would be negotiations over boarder security. Trump did threaten either another shutdown or an emergency action if a deal is not reached. On the trade front, not much happened this week. Commerce Secretary Wilbur Ross stated that the U.S. and China were miles apart referring to disagreements over intellectual property. However, January 30th and 31st will be a high level meeting between Chinese Vice Premier Liu He, Robert Lighthizer and Steven Mnuchin. Usually, when the vice premier attends such meetings it is a positive sign of perhaps more concessions.
Crude oil prices ended the week down slightly. While unrest in Venezuela fueled gains on Friday, growing U.S. inventories had been weighing on prices. The 10-year Treasury yield and dollar fell while gold prices rose on news that the FED may be close to ending the shrinking of its balance sheet.
In the numbers this week:
- The National Association of Realtors reported:
- Existing-home sales fell 6.4% in December. From a year earlier, existing home sales were down 10.3%. A shortage of existing homes, especially lower priced homes, and high home prices were blamed for the slowdown. Also, uncertainty over the government shutdown and trade were blamed.
- Existing-home prices have risen 2.9% from a year earlier, a slowing but still increasing movement in home prices.
- The International Monetary Fund reduced its forecast for global growth in 2019 from 3.7% to 3.5%.
- The European Central Bank left monetary policy unchanged. The ECB concluded it’s bond buying program in December and has indicated it will be some time before it can start to reduce its balance sheet. Mario Draghi had previously said economic risks were broadly in balance but now warned of “the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility”. The ECB still has a deposit rate of -0.4%.
- The Bank of Japan left monetary policy unchanged. The BOJ is still involved with asset purchases and is trying to control the yield curve through it’s bond purchases. The BOJ also lowered its inflation target for the next fiscal year from 1.4% to 0.9% mainly due to lower oil prices.
- The Labor Department reported first time claims for unemployment fell 13,000 to a seasonally adjusted 199,000 despite 25,419 federal employees filing claims. This is the lowest number of claims since 1969 when the U.S. workforce was much smaller. The four week moving average of claims fell to 215,000.
- The Energy Information Administration weekly report is wpsrsummaryattached. Also, the EIA reported
- U.S. Crude oil production remained at 11.9MM barrels per day.
- Storage of natural gas fell 163BN cubic feet as the shift to colder weather has accelerated the drawdown.
- Baker Hughes reported in the past week that the number of active oil rigs rose 10 to 862 and the number of active gas rigs fell 1 to 197.
- Factset reported with 22% of S&P 500 companies reporting earnings, the blended earnings growth rate in the 4th quarter was 10.9%. 71% of companies reporting had positive earnings surprises and 59% had positive revenue surprises.
- The Commerce Department is not issuing any economic reports due to the partial government shutdown.
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Loren C. Rex, CFP®, AIF®, MA Erik A Smith
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
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Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
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These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. The Indices mentioned are unmanaged and cannot be invested into directly.