What a Difference in Just Two Months
Author: Greg Valliere
February 14, 2019
FOUR DRAMATIC REVERSALS IN TWO MONTHS: As the 2018 holidays approached, with the U.S. stock market in free-fall, a pervasive mood of gloom over four major macro stories took hold. Now, two months later, there’s a dramatic change in the outlook for these four narratives:
Optimism on Trade: As 2018 came to a close, there was growing anxiety over a lengthy U.S.-China trade war, with escalating tariffs. This morning, as high-level delegations from each country meet in Beijing, there’s increased optimism over a deal this spring. The big new development is a hint from the White House that the March 1 deadline for a deal could be extended, as we have predicted.
No Shutdown: As Christmas approached, there was deepening gloom over a protracted government shutdown. Now there’s near-unanimity that a shutdown is a terrible idea, and another one will be avoided. Even if President Trump vetoes the modest compromise agreed upon this week, Congress would over-ride him.
Recession Fears Ebbing: Seemingly everyone was talking about an imminent recession as the year came to a close; it felt almost like a self-fulfilling prophecy. But a recession still seems many quarters away, thanks to strong real disposable income and lower interest rates. Much of America — the Pacific Northwest, the Southeast, etc. — is booming, with a red-hot labor market.
The Fed Turns Dovish: This is the big one. Fed Chairman Jay Powell wasn’t intimidated by Donald Trump — that will never happen — but he was intimidated by the angry stock market, which was blindsided by his call for several more rate hikes this year. Now the Fed is on the sidelines for months to come — a tailwind for the markets instead of a headwind.
BOTTOM LINE: There will be no shortage of things to worry about this spring — Brexit, Robert Mueller’s imminent indictments, the enormous government debt, the Democrats’ flirtation with socialism, etc. — but the four huge fears that were pervasive in December have subsided greatly. The market focus may return to the economic fundamentals, which are uniformly good: modest inflation, solid corporate earnings, a strong labor market, adequate GDP growth and steady interest rates. What a difference two months makes.
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