The market has been moving up for some time now and in the last few months the trajectory of the move has become incredibly steep. Over the last 50 trading days, from November 14 through last Friday, the S&P and Nasdaq have each gained 11.4 percent while the Dow has gained an incredible 13.7 percent. We see on the weekly chart below how the trajectory of the rally has changed since mid-November with the two red trendlines.
While the rally has been impressive and has been setting records, this week is an incredibly important one for economic news as well as key earnings reports coming out. First, the economic calendar shows that there are 29 events and reports scheduled for this week including a Fed meeting and rate decision on Wednesday as well as the January employment report which is due out on Friday. If you include President Trump’s State of the Union address on Tuesday evening, this brings the total of events and reports up to 30.
With all of the upside momentum the market has, investors have to be a little concerned that all of these events could cause a stumble in the market. Investor sentiment is reaching extreme bullish readings with the Investors Intelligence sentiment survey reaching bullish extremes not seen since 1987. So what should investors expect from these events?
In President Trump’s speech at Davos last week, he toned down some of the patriotic rhetoric as he spoke to an international audience, saying that he will always put America first, but that America can’t do it alone. In the State of the Union (SOTU) address, I would look for more of a nationalistic tone as he looks to rally the troops. I would look for him to tout the new tax plan and the positive effect it is having on the economy. He will likely use the short-term benefits of the tax plan to pitch a plan for a massive increase in infrastructure spending and military spending. The administration has already hinted that they plan to ask for a tremendous increase in military spending in the 2019 budget. One of the major themes the President had on the campaign trail was the need for a massive overhaul to the infrastructure in this country, but there has been little talk of it since he took office. His first SOTU address might be the perfect time to bring it back in to the forefront, especially after getting the tax plan through as his first major legislative victory.
If I am correct and he spends time talking about an infrastructure plan, we could see the industrial and materials sectors as the biggest benefactors come Wednesday. One industry I am concerned about is farming. If the President continues to speak negatively on NAFTA and highlights it in the SOTU speech, this could have a negative impact on farming stocks as they are some of the biggest beneficiaries of the agreement. While he has threatened to withdraw from NAFTA, the three countries involved continue to negotiate on changes that could be made.
Turning our attention to the Fed meeting, this will be Janet Yellen’s last meeting as chairman before turning the reins over to Jerome Powell. Some analysts are using this fact to downplay the odds of the Fed making a move to increase rates at this meeting. Fed Fund futures are priced such that show a 95 percent chance that the Fed leaves rates where they are at this meeting with current prices showing a 73 percent chance that a hike comes at the March meeting.
Despite the high probability of no changes at this meeting, any time the Fed speaks there is the possibility of a market disruption just based on the tone the message takes and any changes in phrasing to the message. The Fed has been pretty transparent under Yellen and I wouldn’t look for any changes now.
Looking at the expectations for the January employment report, we see that analysts expect the report to show 180,000 jobs added during the month and that is up from the 148,000 that were added in December. The unemployment rate is expected to remain at 4.1 percent and average hourly earnings are expected to show an increase of 0.3 percent just as they did in December. Some of the biggest news stories regarding the tax plan have been companies announcing bonuses and wage increases for their workers. The January report is too early to expect those changes to take effect, but I would expect analysts to start ratcheting up the expectations for average hourly earnings in the months ahead. I think anything between 150,000 and 200,000 jobs created during January will keep the market on track. If the number were to come in too low it might cause a bit of a selloff and if it were too high, it could cause concern about the Fed’s future moves.
In addition to all of the economic data, earnings season continues this week with 25 percent of the S&P 500 reporting this week along with 10 of the 30 Dow components. I have listed some of the bigger names that will report this week with the day they report and what the consensus estimates are for the reports. The stocks that will get the most attention will likely be the FANG stocks of Facebook, Apple, Amazon, and Alphabet.
So far this earnings season there have been few downside surprises. In fact, according to analysts at J.P. Morgan, 79 percent of the companies that have reported so far have beaten the consensus estimates and that is the highest beat-rate in the last eight years.
While I don’t expect the rally to be disrupted this week, there is still a chance that it could happen just because of the amount of information that has to be digested this week. February has been a pretty good month for the market in recent years with the S&P rising in seven of the last eight years. Right now, the market seems to be using Newton’s First Law of Motion- an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force. The question is when will the unbalanced force hit the market?