Dear Santa, I hope you are having a good year. If the recent “Black Friday” shopping sales records are any indication, we know you and your little helpers will be very busy this holiday season. We worked very hard this year to be good and assuming that we are on the “Nice” list, we have a few requests. First, we would like Federal Reserve Chair, Jerome Powell, to let the investing public know repeatedly for the remainder of December that he and his Fed governors are data dependent and then make cooing dove sounds. Second, we would like the recent tariff war “truce” between the US and China to be something of substance, not just dinner table talk and tweets. And if it’s not too much to ask, we would be super excited for the fears surrounding global growth to be eased and the US equity markets to rebound. Oh yes, and we would like peace on earth and good will toward men. Respectfully, Stone Bridge.
Okay, okay so our Christmas wishes are not of the usual variety. We’re just doing our best to keep up the holiday spirit in spite of the previously mentioned major economic themes we believe are at the center of the current stock market turmoil. All kidding aside, let’s take a deeper look into these recent events. Who knows, given the right conditions (economically speaking, of course) we could potentially find ourselves poised for a “Santa Claus” rally. And based on the recent negative market movements, a Santa inspired rally would be a nice gift for everyone to find in their investment stocking.
We begin our deeper look with the Federal Reserve and its mid-December interest rate meeting. While Fed Chair Powell had used a speech at the Economics Club of New York in early December to indicate a more relaxed view toward rate increases in 2019, he disappointed expectations when the Fed released its outlook for 2019. The Fed had not moved enough to satisfy markets. From the Fed’s point of view, US economic growth is expected to return to a level of around 2%-2.5% in 2019, which is consistent with the levels seen during this recovery over the past 10 years. Markets are sending a strong signal to the Fed that it needs to pause despite its stable economic outlook.
While it is generally agreed upon the China needs to fundamentally change how it deals with its global trading partners, few agree that large scale tariffs between the US and China are the most effective way to pursue such changes. To back up that view, money manager Federated noted in a recent report that America’s trade balance has been worsening over the past 6 months. In their opinion, that fact that imports are rising and exports are falling suggests that tariffs aren’t working as intended.
In conclusion, concerns over tariffs, trade, and interest rates are driving expectations of lower global growth and negative market sentiment. As for a “Santa Claus” rally, we would need to see some very positive developments from both the Federal Reserve and the White House. The “trade war” seems to be moving in the right direction, for now, and it seems Chair Powell needs to clarify the Fed’s interest rate strategy for 2019. Good news on these fronts could be just the jump start we need to finish the year (or start the next one) in the green!
We want to wish all our clients and friends a very merry Christmas and a Happy New Year!