After a rough December, we have seen a very strong showing in the stock market at the beginning of 2019. U.S. stocks surged over 8% in the month of January alone, and small cap stocks experienced an even stronger 11% gain.1 In an incredible turn of events, January 2019 was the best month for U.S. stocks in the past 30 years.
With such a banner month behind us, what may not get as much attention is that this return was also earned during a period of heightened and continued uncertainty. Let’s review some of the issues making investors nervous:
The U.S. Government Shutdown
A 34-day U.S. government shutdown (the longest in recent history) was at the forefront of investor concerns. With several hundred thousand workers furloughed, every two weeks of the shutdown was reported to shave 0.1% off economic growth.2 The longer the shutdown dragged on, the greater the fears that it would impair economic growth.
Fortunately, all furloughed federal workers got back to work in the fourth week of January. Although the possibility of another shutdown still looms, for now this concern is at bay — or at least until the estimates of Q4 GDP are released in a few weeks.
After the end of each quarter, companies report their financial results and analysts closely watch how companies performed relative to their estimates. Last year, with the benefit of tax reform, companies reported record quarterly earnings growth in the first few quarters. As the initial shot in the arm of tax reform faded, the consensus expectation was that earnings growth would begin to decline in 2019. However, concerns about a global economic slowdown, combined with the U.S. government shutdown hurting economic growth, exacerbated fears that earnings growth would take an even greater hit in the fourth quarter of 2018.
So far this fear has proven to be unfounded — about 50% of S&P 500 companies have reported fourth quarter results, and of these 71% are beating earnings expectations and 61% are beating revenue expectations.3
Related to earnings growth deceleration (mentioned earlier) is the ongoing worry of a global growth slowdown. China reported some numbers in January indicating that factory activity in the manufacturing sector was contracting.4 This happened just a few weeks after Apple reported weaker than expected sales in China.
Uncertainty and Market Outcomes
If the events of the past month tell us anything, it is that markets can deliver strong returns even through periods of uncertainty. History shows us that investors are often rewarded most for staying the course through periods of heightened volatility. Investors who pulled out of stocks in response to the market decline in December 2018 would have missed out on the strong returns experienced in January. Market gains can come in spurts, and missing out on just a few days of strong stock returns has a negative impact on long-term returns.
There will always be new issues of the day that make the headlines, and while we may watch these events with interest, our approach to managing your portfolio is to tune out the short-term noise and focus instead on the long-term factors that drive portfolio returns.
Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently audited or verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged and unavailable for direct investment. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.