The Pendulum

The pendulum of market sentiment swung back from optimism this week landing the equity market in a tight spot.  There is a lot of good news now priced into this rebound in 2019.  The risk of a monetary policy mistake was further reduced as the European Central Bank (ECB) followed the Federal Reserve’s lead on Thursday in keeping the liquidity spigot turned on.  Neither the US nor China have an appetite for further growth hits from trade disputes leading to a “kick the can” expectation in the near-term.  US Q4 GDP published at the end of last week was stronger than expected and US wage growth from the employment report is +3.4% year-over-year supported by a low unemployment rate.

What else can go better than expected to lift stock prices higher?  Monetary policy makers are at full throttle so further government support lands squarely in the fiscal camp.  So far, legislators still can’t get out of their own way in the US or abroad.  Growth expectations for 2019 continue to come down.  The ECB action was against the backdrop of a cut to the region’s GDP growth expectations for the year from 1.7% to 1.1%.  Slower growth is flowing through to earnings revisions.  And why not?  Company management teams can use all of the background macro noise to “kitchen sink” any concerns they have to lower the earnings expectation bar they must jump over to make the Street happy.

So we are left with equity prices higher, earnings revised lower, and not a lot of catalysts while we wait for fundamental improvement. We expect the market chop to continue for a bit, but remain steadfast in our long-term strategic allocation.