The “Powell put” comes to the markets’ rescue

Shoppers in America © Getty
US consumption and growth should remain solid

“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 said
that 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.

“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.

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.