The S&P 500 fell 2% last week, marking the first losing streak of the year. The Dow Jones Transportation index, often viewed as a leading indicator for the broader market, has fallen for 11 straight days. There are several reasons for the pause in the v-shaped rebound off the lows from 4Q 2018. First, it’s natural for the market to consolidate gains after a rapid double-digit increase in prices. The S&P 500 also bounced off the 2800 level, which is seen as a near-term ceiling for many traders.
Moving on to more fundamental factors, the global deceleration in growth has not yet bottomed. Last week, the European Central Bank downgraded its estimate for 2019 EU growth to 1.1% from 1.7%. They cut their inflation target to 1.2% and said they did not expect to hike rates until 2020. They also initiated another round of quantitative easing aimed at supporting the economy. The Dollar traded higher on this news, to 1.12 versus the Euro. A strong Dollar means cheaper European vacations, but it is also a headwind to earnings for international companies.
Europe isn’t alone. Friday’s export data out of China was ugly and Chinese stimulus has not yet been effective improving its domestic growth rate. Federal Reserve Bank of Atlanta GDPNow model is estimating only 0.5% U.S. growth for the first quarter of the year. First quarter GDP has been wacky for the past seven years, consistently coming in well below the annual average. Wacky could also be used to describe Friday’s Jobs report. The U.S. Labor Department reported the economy added only 20,000 jobs during the month of February, well below expectations of 180,000. This figure is incongruous with other employment survey data, which showed the unemployment and underemployment rates fell while labor participation held steady. January’s employment number was revised up to 311,000 and average hourly earnings grew 3.4% year-over-year.
Not all the data was bad last week. The U.S. Census Bureau reported that housing starts surged 18.6% month over month in January. With January’s reading, housing starts were down 7.8% from January 2018. On an annual basis, single family housing starts are up 4.5%, while starts for complexes with five or more units are down 33.6% from the same time last year. We have noted the weakness in the housing sector as a key rationale for the Fed’s pause in 2019. It is encouraging to see a housing data point strengthen, but the collective economic data still warrants a dovish Fed in 2019.
Despite the recent news flow and market weakness, we have not changed our forecast for 2019. We believe the U.S. economy will grow close to 2.5% thanks to a healthy consumer and greater fiscal stimulus in 2019 compared to 2018. We also believe earnings growth could exceed expectations following a trade deal with China. Despite signs of friction in the U.S./China trade talks over the weekend, we still expect a deal will get done.