The S&P 500 was flat this week as the index sits just 1.2% off of its all-time high set last September. The market has had an incredible rally to start 2019 after its steepest decline since the Great Recession in the 4th quarter. Not every index is approaching a new high; the Russell 2000, which tracks small cap stocks, is still off over 10%. However, it had further ground to makeup than the S&P 500 as it declined 28% during the 4th quarter.

As we have discussed before, the turnaround in the stock market was triggered by the Federal Reserve pivoting from a path of quarterly interest rate hikes to holding tight at current levels. This change of course was the right decision and further evidence of that are recent figures that show inflation continues to drift lower. In fact, in the last five or six years concerns about deflation have been more prevalent than concerns about inflation.

This week brought good economic news on several fronts:

1) The jobs market continues to be robust, with the latest release of claims for unemployment benefits. From CNBC:

The number of Americans filing applications for unemployment benefits fell to more than a 49-1/2-year low last week, pointing to sustained strength in the economy.
Initial claims for state unemployment benefits dropped 5,000 to a seasonally adjusted 192,000 for the week ended April 13, the lowest level since September 1969, the Labor Department said on Thursday.

2) U.S. retail sales increased 1.6% last month, making this the biggest rise since October 2017, and beating expectations for an increase of 1.1%. The consumer continues to be alive and well.

3) Earnings reports for the 1st quarter have been much better than expected so far, beating expectations by 5.7%. Earnings estimates were brought down by analysts in the wake of the market sell-off and global slowdown, but if companies continue to outpace expectations by close to 6% that could be a good sign for the rest of 2019.

While the U.S. economy continues to see strong growth, Europe and Japan are flirting with recession as several issues weight on growth, including the lack of pro-growth reforms.

The following chart shows the decline in two measures of economic activity in the Eurozone:

In 2018, economic growth in China was its weakest since 1990. However, there are now signs that this economic slowdown may have bottomed. China is such an important part of global growth so a reacceleration in business activity would be a welcomed development.

After a painful decline in credit growth during 2018, we have seen a dramatic turnaround to begin 2019. Further stimulus efforts by the Chinese government also is a boost to growth, though they have to be careful here as they already have high debt levels, thanks in part to previous stimulus efforts.

With the Federal Reserve on the sidelines for the time being, attention has turned to earnings growth and the state of the Chinese economy. In spite of weakness in Europe and Japan, the recent data has given good reasons to be optimistic that the market can take out the September highs. I will leave it on that note, have a good weekend.

S&P 500 Approaches All-Time High