Rebound off a Miss

U.S. stocks bounced back strongly from December’s swoon to turn in their best quarter in nearly 10 years. The S&P 500 rose 13%, the Dow added 11%, and the Nasdaq surged 16%. While technology companies led the way, the rally was broad-based, with all 11 sectors in the S&P advancing. This surge represented a remarkable turnaround from the fourth quarter of last year, when U.S. stocks sank an average of 15%. It’s not very often dramatic market moves can be attributed to a single factor. When stocks plunged a quarter ago, we pointed to a number of causes – trade wars, a slowdown in China, and Brexit – as contributing to a more pessimistic outlook. Progress on none of those issues has been great enough to explain this rebound. One factor can, however; the actions of Fed Chairman Jerome Powell.

Even before the Fed raised rates for a fourth time in a year last December, the Treasury yield curve “inverted” for the first time in 10 years. An inverted yield curve is when the yields on bonds with a shorter duration are higher than the yields on bonds that have a longer duration. It's an unusual situation that often precedes a recession. But in raising rates last December, the Fed dismissed those concerns. The market’s reaction – like the President’s – was fierce. Within days, the Chairman was reversing course, suggesting that the Fed would be “patient” with further rate increases. The adjacent chart tells the story of the ensuing recovery.

Despite recent performance, stocks are off the highs reached last October as economic growth has slowed noticeably since the middle of 2018. While the job market continues to be strong, the economy is not growing so far above stall speed that it couldn’t be knocked into recession by an economic shock. Which takes us back to trade, China, and Brexit. That these issues have remained in the headlines this long suggests how difficult they are for the political leadership. Each could still turn out well, or quite badly.

This is why it’s imperative to have strong leadership at globally important institutions like the Fed, and why Powell’s dramatic course reversal requires explanation. To most observers, he either got the economics wrong or he succumbed to political pressure. Neither explanation is satisfactory, and for investors in want of a steady hand to guide us through the next recession, this has to be a little unsettling. A loss of credibility for this institution is an unwelcome development in a time of diminished confidence in political leadership world-wide. Let’s hope the Fed’s future actions serve to burnish rather than tarnish its reputation.

While all of these dramas play out in the macroeconomic arena, it’s important that investors pay attention to the arena in which they do have control, their own finances. In uncertain times, which is to say at all times, a solid financial plan is the path to achieving one’s personal goals, and some peace of mind.

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