A Fed on Pause

The stock market rally to begin 2019 has certainly been a welcome sight after the steep declines the market suffered in the 4th quarter of 2018.

Let’s take a look at some of the factors impacting financial markets.

The Fed

Stock market declines were ignited on October 3rd when Fed Chair Jerome Powell said that more hikes were on the way and that rates were “a long way from neutral.” Market declines accelerated on December 19th after Powell’s hawkish statement that the Fed’s plan to reduce their balance sheet was on autopilot.

In early January we saw the start of an almost 180 degree turn by Fed Chair Powell from his stance in the 4th quarter. This has been the primary driver of the strong rally stocks have had to begin 2019. 

As we said in December, it was time for the Fed to take a pause on their plan to hike interest rates and let the economy work through the cumulative impact of nine interest rate increases.
Now that the Fed has moved to the sidelines, at least for the time being, we will see what the impact on the economy will be as we progress through 2019.

U.S. Consumer

The driving force behind the U.S. economy is consumer spending. By almost every measure the consumer is doing very well. In February consumer confidence bounced back to very strong levels. This bodes well for future consumer spending.

For over 40 years Gallup has polled Americans about their finances. Their February report had more good news on the consumer front:

Americans’ optimism about their personal finances has climbed to levels not seen in more than 16 years, with 69% now saying they expect to be financially better off “at this time next year.”
The 69% saying they expect to be better off is only two percentage points below the all-time high of 71%, recorded in March 1998 at a time when the nation’s economic boom was producing strong economic growth combined with the lowest inflation and unemployment rates in decades.

For our final look at the U.S. consumer, the Labor Department’s February Employment Report showed employee wages grew 3.4% year-over-year. This is the fastest pace of wage growth in ten years. Strong wage growth had been missing for most of the economic recovery, but has greatly improved over the last year.

With the Federal Reserve on hold for now with regards to interest rate hikes and with the U.S. consumer very optimistic, economic growth in 2019 should be strong once again in the U.S., a far cry from the many calls for recession we heard in the 4th quarter of 2018.

That said, we are certainly later in the business cycle and the picture for the global economy is much more concerning. Our next post will look at the global economic slowdown and the impact the trade war is having on China’s economy. Have a great weekend.