Fed Channels Inner Gymnast to Lift Markets

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Market sentiment has turned notably more positive in the last week. So what changed? In a nutshell, the spectacular nonfarm payrolls report of 312,000 jobs added in December allayed recession fears. Maybe the economy is not falling off a cliff when companies are adding jobs at such a rapid rate. In addition, small business optimism ticked down slightly in December but remains near all-time highs and both the ISM manufacturing and services indicators are firmly expansionary. The trade turmoil is still an issue, but news surrounding the current talks with China is cautiously optimistic. Finally, the Federal Reserve’s tone changed dramatically.

In his latest comments, Fed Chair Jerome Powell showed a gymnast’s instincts, bending over backwards to convey the Fed’s flexibility with both rates and the balance sheet. The willingness to listen to markets and exercise patience and caution was just what investors needed to get their floor routines back on track. Does that mean the volatility is over? Nah. Global growth estimates, trade concerns and rate policies will continue to impact markets, but fourth-quarter earnings season on tap should help settle investors. Expectations are for 12% growth in 4Q18. Looking forward to 2019, we expect earnings growth to slow but not stall; and at the end of the day, advancing corporate earnings are the fundamental drivers of markets.

Please watch the Fed rates and balance sheet moves on pages 34 and 39 of the Global Perspectives Book.

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