In the last three months of 2018, investors were becoming increasingly concerned that the Federal Reserve was raising rates too quickly and that higher borrowing costs would choke off economic growth that was already set to ease due to the winding down of tax and fiscal stimulus. In December, the Fed raised its benchmark interest rate a quarter point to a range of 2.25% to 2.5%, then signaled that two more hikes were likely in 2019. Stock investors, already feeling engulfed by a maelstrom of negative macro news, responded by sending the market down 8% in the worst December since 1931.
Patient Fed Boosts Markets
Well, in the span of a month, the Fed’s position has changed abruptly. Fed Chairman Powell now says that the Fed can afford to be “patient” and that “the case for raising rates had weakened somewhat” given indications of tepid inflation and a firm, but not overheated, labor market. Investors dutifully changed their collective tune and sent stocks soaring nearly 8% for the best January in 30 years.
Cautious Investors Focus on Earnings and Trade
Now, with the Fed adopting a wait and see approach and the government shutdown over (at least for the moment), investors can get back to focusing on company-specific matters and progress with the China trade talks. At least for now, they can relax about the Fed while they parse through the very constructive fourth quarter earnings results being reported now. While the prevailing view in December seemed to be that corporate outlooks for 2019 would be awful, that is proving not to be the case. Trade issues aside, the U.S. economy remains on solid footing and companies are looking forward to a decent 2019. The big wild card remains the China trade issue.
Slow Growth May Not Harm Stocks
U.S. economic growth is likely to slow a bit in the new year, however, and the world, it would appear, is still stuck in the low-growth, low-inflation mode it has been in since the 2008-09 financial crisis. The concerns hanging over the global economy include an aging workforce in the developed world, excessive global savings, weak productivity growth and lack of demand. Overseas, the large economies in Europe and Asia remain weak, keeping a lid on global growth prospects, but also keeping interest rates low. This situation may not sound all that great, but stocks have proven they can actually make decent headway in such an environment.
Long-term Investors Hold Steady
Sharp moves in markets such as those we have experienced in recent weeks can be unnerving, but equity investors are best served by not overreacting and instead focusing on maintaining a long-term view with their equity holdings.