The Atlanta Journal-Constitution
MIXED SIGNALS ON ECONOMY: A REBOUND AND A WARNING
Stocks have staged a remarkable turnaround in the early days of 2019, rebounding after an end-of-the-year tailspin that was fomented by fears of recession in the United States.
Three straight weeks of gains in the new year on Wall Street have erased nearly all of 2018’s losses. It’s the best start to a year since 1987.
What caused decline
Many factors behind last year’s troubling decline remain unresolved. American companies and consumers are less optimistic about the future, and large economies like Germany and China are signaling a global slowdown driven by the trade war. Britain is in turmoil over leaving the European Union. And a new concern, the longest federal government shutdown in history, also poses a risk to the domestic economy.
A month ago, any one of those elements might have fueled a steep decline in stocks. In December, waves of panic-driven selling left the S&P 500 dangling almost 20 percent below its high. Now it’s all being taken in stride.
What caused rebound
The difference is an abrupt change in tone from the Federal Reserve. This year began with repeated public assurances from Fed officials that they were sensitive to concerns about the economy and would be patient and flexible as they decided whether to raise interest rates.
Investors were alarmed last year by the idea that the central bank was determined to keep raising rates, risking a recession.
The Fed has always held sway over the financial markets, but that influence tends to grow in the later stages of an expansion, when every interest rate increase is seen as the one that might trip up the economy.
The U.S. economy is still strong: The unemployment rate is near 50-year lows, wages are starting to rise and growth in corporate profits remains robust. To the Fed, these are reasons to keep raising borrowing costs and stave off potential inflation. It did so four times in 2018.
What’s next
But after 10 years of economic growth, many investors are worried that a turning point is near, and that higher interest rates might bring on a slowdown faster than they expect. And the recent stock market gains may not stick without proof that corporate profits can keep growing.
“We’re in a bit of a ‘show me’ moment for skeptical and uncertain investors,” said Kate Moore, chief equity strategist for BlackRock, the world’s largest investment firm. “It’s going to have to be backed up with earnings.”