• Markets continue to rally as the fears that caused the 2018 correction continue to fade.

• We expect volatility to persist and wouldn’t be surprised to see a near-term pullback.

• But we also remain constructive and suggest investors approach the market selectively and tactically.

The equity market rally that began at the end of December continued last week, with U.S. stocks rising 2.6 percent, as measured by the S&P 500 Index.1 Energy led the way, thanks to a 5 percent jump in oil prices.1 Defensive areas of the market underperformed, although the utilities sector was the only one to actually lose ground.1 Despite many near- and long-term risks, investor attitude toward the big risks that drove stock prices lower in the fourth quarter (trade issues, recession fears and worries over Fed policy) have turned remarkably. We have a generally constructive view toward stocks, but think markets may be due for a pullback.

Weekly Top Themes 

1. Consumer and business confidence should improve over the coming months. Many sentiment measures have declined amid the turmoil in Washington and volatile financial markets. With the risk of another shutdown averted and better news on the trade front, we think sentiment should rise.

2. Tightening lending standards could create additional downside growth risk. Should this trend start to cause capital expenditure growth to drag, we would see reasons for worry. So far, business confidence suggests capex spending will remain OK.

3. U.S. China trade negotiations are moving in a positive direction, but risks remain. We think we’ll see a modest agreement in the coming weeks, or at least an agreement to delay the March 1 deadline and keep talking. But key issues such as intellectual property rights are likely to remain unresolved, meaning trade issues aren’t going away any time soon.

4. Fourth quarter economic growth may have been worse than previously expected. A sharp drop in December retail sales has caused many economists to lower their forecasts for growth, suggesting the economy entered 2019 with less momentum than anticipated.

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