It sounds awfully cliché…but what a difference a few weeks makes.
Equity markets are up 5% since the last update. While part of the catalyst was the New Year enabling certain market participants to return, the real driver was Fed Chair Powell’s speech last Friday. It gave investors everything we could have asked for, specifically:
- the Fed acknowledged that financial markets are predicting an economic downturn, and that while the Fed does not agree it is also “listening carefully” because this view can be self-fulfilling;
- it indicated that the pace of rate increases will slow; and,
- the Fed dispelled the myth that its balance sheet reduction is “on autopilot”.
Even more importantly, this speech came hours after very strong December US employment data were released. Previously, these would have been viewed as a clear signal that the Fed will continue its path of increasing rates. Equity markets instead interpreted the content and (more importantly) the sequence of the two events as a sea-change, and have risen almost every day since as a result.
Equally interesting is what hasn’t happened: Q4 earnings season will kick-off this week, and save for Apple and a few of its suppliers, no major companies have negatively pre-announced results. Apple’s situation appears idiosyncratic – specifically its value-proposition is diluted in China because of WeChat – which leaves a highly positive set-up for equity markets over the coming weeks.
Offsetting this is the fact that management teams are likely to leverage the macro environment to low-ball 2019 guidance. But given magnitude of the Q4 sell-off, the balance of risks for equities still feels positive. Additionally, if the S&P rises just a few more percent it will be up almost 10% YTD, which coming in the first month of the year is more than enough to spark full-fledged FOMO by institutional money managers. Even with the wild card risk of US-China trade tensions still outstanding, from our perspective the near-term prospects for equity markets continue to appear very compelling.