The month of January has seen a rebound in stock prices after a very rough December. December saw a market awash in pessimism. Part of this pessimism was based on worries over continued interest rate increases by the Federal Reserve. This concern has diminished in January. In general, analysts and investors are no longer concerned over a Federal Reserve rapidly increasing interest rates to a level that would send the economy into a recession. The Federal Reserve has recently communicated a much more modest outlook for rate increases than they had late last year.
The biggest single driver of stock prices are corporate profits. 2018 profit growth came in at around 11-12% when backing out the benefits of the corporate tax cut. 2019 earnings are projected to be about 6%. That is about half of 2018’s rate. By historic standards, 6% growth is good. We would encourage clients to keep this in mind when reading financial news. To reiterate, 2019 is expected to see a lower rate of growth than 2018. That does not mean a contraction, slowdown, recession, or any other negative activity. It just means a slower growth rate.
In summary, the month of January has seen a significant portion of December’s market declines reversed. This is due in large part to earnings releases that note revenues, sales, etc. during the last quarter, but also provide guidance for the next. About a quarter of companies have released these figures so far, with the bulk of releases coming out over the next 2 weeks. The main takeaways right now are that the market has largely gained back the declines experienced in late 2018 and that earnings are largely expected to continue to grow during 2019, although at a lower growth rate than in 2018.