January financial markets saw either a rebound in optimism or a willingness to bargain-hunt exhibited by investors, leading stocks to one of their strongest Januaries in history. These returns ensued despite mixed signals and doubt which still prevail both domestically and abroad. Regardless, markets responded to last year’s torment with renewed vigor. Domestically, we dealt with the longest government shutdown in history (35 days), whose economic impact has yet to be determined, and a possibly related decline in consumer confidence. On the positive side, employment numbers remain strong, with jobless claims generally coming in lower than expected. Manufacturing activity slowed, with the ISM Index moving from 58.8 to a worse than expected 54.1, but remains expansionary. Inflation continues to be benign, with a 2.2% CPI number reported this month. Additionally, in their January meeting, the Federal Reserve signaled that it would be "patient" when considering future rate hikes. This alleviated fear of the Fed being over-restrictive and choking economic growth, providing ﬁnancial markets with perhaps it’s biggest boost. Growth expectations for the U.S. economy have lessened to the 2.5% range, down from the 3.0 to 3.5% expected last year. Abroad, there continues to be uncertainty regarding both a trade deal with China and the outcome of the British Brexit endeavor, which weighs substantially on the markets, both domestic and foreign.
Equities rebounded sharply in January, as investors took advantage of the discounted stock prices produced by the 2018 market’s negative return. The 8.01% return for the S&P 500 was the strongest January number in three decades. The market’s strength was broadly based as all equity indices, large and small, foreign and domestic, participated. Cheaper prices, strong economic numbers, and a more dovish Fed stance encouraged investors and stimulated buying. Adding to market enthusiasm were corporate earnings, which were generally reported as better than anticipated. January returns were created while overcoming the effects of the shutdown, Brexit, and the trade dispute. These effects continue to hang over the financial markets, and will be watched with great interest.
Treasury yields remained largely steady through January, ending the month slightly lower. Most of the movement was concentrated in the 5 to 7-year maturities, which saw 8 basis point declines. Longer and shorter maturities experienced slightly lesser changes with no significant effect on the yield curve. Responding to the Fed statement led T-bills also lower in yield for the month. Bond markets began the month expecting between one and two more interest rate hikes from the Fed and ended the month with no 2019 hikes priced in the market. Credit spreads tightened in conjunction with the bullish equity market, pushing credit based indices higher. This tightening is most apparent in the high yield sector, whose index sported a 3.74% return for the month.