The fourth quarter battered the U.S. equity markets. Market sentiment turned negative and investors became fearful that a recession was on the horizon because: 1) the Federal Reserve was going to continue raising rates for the foreseeable future, 2) the trade tensions between the U.S. and China would escalate. While these concerns are legitimate, the paths to resolve both have been underappreciated. Less than two weeks into the new year, negotiations with China are narrowing trade differences, and the Federal Reserve chairman stressed that they are not on a preset course, but are listening to the markets. Markets responded positively.
While trade negotiations with such a large partner like China can be harrowing, recall that the U.S. is seeking lower tariffs, lower export subsidies for Chinese companies, and more stringent protection of U.S. intellectual property. A successful trade agreement would be a significant boost to market sentiment and U.S. growth.
Students of financial history know that it is normal for Federal Reserve leadership to receive broad criticism when they are orchestrating a rising rate environment. We don’t wish for the ‘good ole days’ when the Fed employed a minimalist communications approach, but the changes in communication made over the last decade have swung too far. Simply put, the Federal Reserve talks too much, giving them greater opportunity to misspeak and cause unintentional damage. Last quarter was only the latest example when Chairman Jerome Powell was quoted saying we were a ‘long way from neutral’, in reference to how far the overnight rate had yet to go.
For 2019, we expect U.S. economic growth to be strong, inflation to be contained, the unemployment rate to remain at historical lows, and 7 – 9% earnings growth in Corporate America. These are all very encouraging supports for long term investors.