Market sentiment was notably improved in January following the dismal performance for risk markets in December. The S&P 500 generated an 8.01% return in January on the heels of a 9.03% decline the prior month. There was a similar bounce in high yield corporate debt, with the ICE BofAML 1-5 Year US High Yield Index out-performing Treasuries by 341 basis points (bps) versus a negative 317 bps excess return in December. Some attributed the rebound to the “January effect,” a long-standing hypothesis that there is a seasonal anomaly/technical in financial markets where prices of riskier assets increase more in January than other months. However, a big boost for risk markets to begin 2019 was the perception of a more dovish Fed. A consistent theme from Fed leaders throughout the month was “patience” with regards to future policy actions, and the FOMC meeting on January 30 reflected this theme, as discussed in more detail below.
Riskier assets bounced back in January following a rough end to 2018.
A more dovish Fed was the primary source of improved sentiment.
At the January meeting, the FOMC called for “patience” regarding future policy decisions, and a separate statement pertaining to balance sheet normalization revealed some unexpected insights.
While the Fed has been the major driver of market sentiment in recent weeks, there have been other events on the radar of investors. Most notably has been the progress, or lack thereof, in negotiations between the United States and China on trade and other related issues. Officials from both countries met in Washington last week, and the ensuing press conference suggested it was a very positive meeting. However, the pressing question for markets is if and when tariffs will be lifted by each country. Regardless, the odds of a détente between both parties have increased, which would be a well-received event by global markets. It now appears that a delegation of U.S. officials will travel to China in early February to continue talks, and reports suggest President Trump could meet with Chinese President Xi in late February following Trump’s summit with North Korea.
This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.
Want more credit union strategies? Sign up for the CreditUnions.com free newsletter.