Fundamentals May Rule While Fed Speakers Go Away
Equities were mixed last week as Friday’s trading nearly salvaged a down week. So far, 11% of S&P 500 companies have reported earnings and the number of companies out-performing is below the 5-year average.
Approximately 67% of companies have exceeded earnings expectations and 64% have beat on revenue expectations. There was welcome news last week on the inflation front. The Producer Price Index fell more than expected (-0.5% vs –0.1%) in December. On a year-over-year basis, Producer Prices are now lower than Consumer Prices, which has historically been a strong correlation to overall lower inflation going forward.
Implied futures on the February Fed hike show a 99% probability of only a 25 basis point rate hike. For reference, December’s rate hike was 50 bps and November’s rate hike was 75 bps.
Implied futures for a pause or “pivot” in rate hikes for the March meeting has picked up at now a 20% probability. A pause in March would be good news for the consumer and the economy. We are now in a “blackout” period for Fed speakers, so markets may move more on fundamentals this week. There could be a looming battle over the Debt Ceiling this week. Government shutdowns have been debated for decades as to whether or not they affect markets. The results, historically, have shown the average returns for equities during government shutdowns is flat. The longest shutdown occurred during from December 22, 2018 to January 25, 2019 (34 days). The S&P 500 Index was up 9.1% during that shutdown. The second longest occurred from December 16, 1995 to January 5, 1996 (21 days). The S&P 500 Index was up 0.2% during that shutdown. In other words, government shutdowns are not a reason to make dramatic investment changes in either direction.
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