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Several times since Federal Reserve Chairman Jerome Powell commented back on October 3 as the stock market was setting all times highs that “the really extremely accommodative low interest rate that we needed when the economy was quite weak, we don’t need those anymore” we have noted that this hawkish stance along with the trade war with China was what has been sending stocks lower. Despite this statement we nonetheless expressed confidence in Chair Powell, and in our column that appeared on October 14 wrote that “despite these statements by Powell, we believe the Fed will err on the side of cau- tion.”
Now fast forward to this past Wednesday keeping in mind that the stock market has declined nearly double digits from the “long way from neutral” speech by Powell in early October. Housing and employment data has weakened considerably calling into question the longevity of this economic recovery as well as the bull market in stocks. Chairman Powell was scheduled to speak before the Economic Club of New York in what was to be closely followed. Would Powell maintain his hawkish stance, a path that investors determined was preset and not data dependent or would he take into consideration the sluggish economic data as well as the upcoming meeting between President Trump and President Xi of China in Buenos Aires regarding trade.
Chairman Powell, in what we believe is appropriately so, did not disappoint. In his prepared remarks, he was explicit in stating that “while the FOMC [Federal Open Market Committee] participants’ projections are based on our best assessments of the outlook, there is no preset policy path. We will be paying very close attention to what incoming economic and financial data are telling us.” Bingo. With the above statement Powell removed one hurdle from stocks moving higher. In our opinion one major one remains and that is the meeting that is concluding today (Sunday) in Buenos Aires, the meeting of both industrialized as well as emerging economies, more widely known as the G-20 Meeting.
Although we do not be- lieve any type of concrete trade deal with China is likely, investors would be more than satisfied if President Trump delayed the imposition of a twenty-five percent tariff on an additional $200 billion of Chinese imports, scheduled to be imposed January first. Although probably not received as warmly would be a joint statement that talks between the two nations would continue and accelerate in order to come to some sort of reconciliation as soon as possible. That said, the financial markets would most likely frown upon continued heightened rhetoric between the two with no mentioned of a continuance of the negotiations.
We believe that even if the G-20 meeting fails to deliver any satisfactory response from Trump and Xi, a more dovish Fed as outlined above most likely removes the potential for a severe bear market as only about 13% of U.S. Gross Domestic Product (GDP) comes as a result of exports. That said and should this be the outcome from the G-20, our stock market will most likely remain quite volatile and probably tilted to the downside until this trade war/tiff is over.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-2791044.