The “Powell put” comes to the markets' rescue

2018 was the worst year for US stocks since the financial crisis. But the Federal Reserve has said it is willing to suspend quantitative tightening if the situation worsens.

929_MW_P04_Markets

"Yes, stocks do go down sometimes," says Carleton English in the New York Post. US equities surged in 2016 and 2017. But 2018 was their worst year since the financial crisis. The S&P 500 index, which tends to set the tone for the world, fell by around 6%. It slumped by 10% last month, the worst December performance since 1931, when America was suffering from the Great Depression. The technology-dominated Nasdaq index lost 4%. Other markets fared worse. Britain's FTSE 100 slipped by 12.5%; Germany's blue-chip DAX index lost a fifth. There are plenty of reasons for markets to be "skittish", says The Economist.

A sea of troubles...

Headwinds have strengthened over the past few months. The earnings growth of US companies is fading as domestic and global economic growth slows; the S&P 500 companies derive around 30% of their revenue from abroad. Analysts expect earnings to grow by 10.4% on average for S&P 500 companies in 2019, according to FactSet. This figure has now been revised to 7.9%. Investors were rattled last week when tech giant Apple downgraded its revenue forecast. CEO Tim Cook saidthat demand from China was slowing. This reinforced concern that the tech sector, which has led the market advance, is overvalued and running out of steam.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

"All the macro evidence points to a further slowdown in 2019," says Gavekal Research. The effect of Trump's stimulus package is fading. China is slowing down (see story below), and the ongoing trade spat also bodes ill.

... but help is at hand

But the jitters may be overdone. US growth may have eased, but it has hardly fallen of a cliff. The labour market is still strong, which bodes well for consumption and growth: household spending accounts for around 70% of GDP. The recent US jobs report revealed that employers took on another 312,000 staff last month.Wages rose at their highest annual rate since 2009, climbing 3.2%. Along with the recent slide in the oil price, which eases pressure on budgets by lowering petrol prices, this will boost disposable income.

Advertisement
Advertisement - Article continues below

Most importantly, however, the key problem for markets recently has been central banks' gradual withdrawal of liquidity. And on this front, at least, the news from the world's most important central bank is good. US Federal Reserve chairman Jerome Powell "called off the hounds" last week, says Ambrose Evans-Pritchard in The Daily Telegraph. Before Christmas, the Fed planned to shrink its balance sheets by $50bn a month. Now, it's willing to suspend quantitative tightening (the unwinding of its money-printing programme) if the situation deteriorates. The apparent return of the "Fed put", the central bank's tendency to ride to the rescue if the markets are in trouble, bodes well for liquidity-addicted investors. It can't negate deteriorating fundamentals, but it militates against a sharp fall. "Powell's magic words," says Stephen Innes of forex group OANDA, "should continue to support" sentiment for now.

Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019
Visit/510135/trade-war-ceasefire-boosts-stockmarkets
Economy

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

Visit/investments/commodities/gold/600874/gold-is-at-its-highest-level-in-years-heres-how-to-invest
Gold

Gold is at its highest level in years – here’s how to invest

Gold's rise at a time when the dollar is unnervingly strong isn't unheard of – but it is curious. John Stepek explains what's going on, and what it me…
21 Feb 2020
Visit/investments/stocks-and-shares/600863/sirius-minerals-anglo-american-takeover
Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020
Visit/economy/global-economy/600876/the-charts-that-matter-its-starting-to-look-a-little-unhinged-out
Global Economy

The charts that matter: it’s starting to look a little unhinged out there

Things aren't normal in the markets right now, says John Stepek. Here, he looks at the charts that matter most to the global economy for clues to what…
22 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020