At a time of unpredictable and unpresidential behavior at the White House, we have the Fed, whose behavior has now become predictable. Going into the FOMC meeting last week, financial markets demanded that Federal Reserve Chairman Jerome Powell ease up on tightening monetary policy. And he listened and capitulated. Fed Chair Powell, who had previously stated that the Fed was on “automatic pilot” with respect interest rates and its balance sheet run-off, surprisingly, reversed course as if to say that the stock market’s December tantrum was too noisy to ignore. Fed decided to hold interest rates steady and it’s entirely possible, at this point, that the Fed is done raising interest rates for this cycle.
In the meantime, dismal earnings season continued with companies, from industrial giant Caterpillar to Amazon to tech firm Nvidia. Many used the same reason to explain the shortfall to investors — China. Beside the slowdown within China, it is increasingly becoming clear that the economic environment in China has been further impacted by rising trade tensions with the United States.
Where is market headed given this backdrop?
Future Wealth’s View
The main problem we have with the Fed’s decision is that it sounds as if Fed has let down its guard because stock prices have fallen, but a strong rebound could make the Fed nervous again. But, the stakes are bigger than just the level of the markets. With global growth slowing, the U.S. economy appears headed for a slowdown along with China and Europe. A return trip of the stock market into bear market territory could help turn an economic slowdown into another financial crisis. The biggest concern is that if the Fed continues to react to the stock market gyrations and waits until economic weakness starts showing up in the data, they will be behind the curve.
But near term, we expect the stock markets to inch up and when the trade tensions with China ease, we could begin to the see an onslaught of new money pouring in, that will take equity markets even higher. It may be time to unwind defensive positions and look for dips to begin buying into growth.