No one will ever be sure why Federal Reserve Chairman Jerome Powell and his associates decided to raise rates on December 19, 2018 in the face of Brexit uncertainty, trade tensions with China, and quantifiable signs of a slowing domestic economy. President Trump had publicly criticized Chairman Powell and the Fed for its seemingly steadfast desire to raise rates to about 2.5% regardless of what was going on around us. Comments that suggested that the bond taper and the Fed had a process began to spook investors as early as October. It all came to a head when the Fed raised rates just before Christmas, a day after large layoffs at General Motors, leading to the climatic sell-off on Christmas Eve. This decision and the accompanying tone-deaf rhetoric of the Federal Reserve Governors has given way to a Federal Reserve that looks to be on the sidelines for the foreseeable future.
Whether the December rate hike was driven by politics, the perceived need for the Fed to assert its independence, or a simple misreading of the tea leaves, it is now clear that the Federal Reserve has backed away from further rate hikes. These actions increase the likelihood of stocks retaking new highs sometime later this year. It appears that the market has discounted relatively poor earnings in the first quarter hoping that global growth can accelerate as we work through familiar issues that had us so worried just three months ago. We spoke about confidence last quarter and investors are simply more optimistic when they have the Fed behind them. Even if first quarter earnings disappoint, deal making and a busy IPO market should support stocks for now.
This remains a decent environment for stocks that could be great if we get a favorable resolution to China and if Brexit is no more disruptive than it is currently. Boeing’s troubles could impact the next quarter or two, as well, but there are always stock specific issues and frankly most seem manageable as long as the Fed ensures that liquidity remains high.
I would like to see improvement in financial and cyclical stocks, adding additional legs to a stool that is built on the strength of technology. Broader markets are stronger markets.
We are here for you in both good quarters and bad.
All the Best–
Joseph H. Ray