Interest Rates and Tariffs and the Market

The positive action in the market in the first week of November turned negative in the trading days leading up to the Thanksgiving holiday.  Investors had two major concerns.  It seemed the Federal Reserve was being too aggressive in raising interest rates and another round of tariff increases with China in January could dampen economic growth.

The good news is that the decline in the Dow in October did not take out the lows set back in February and April this year, and the November decline did not go as low as October.

Then Jerome Powell, Federal Reserve chairman, spoke to the Economic Club of New York in the week following Thanksgiving.  When the Fed chairman speaks the market listens.  His comments were in stark contrast to the comments in October that sent the market into a tailspin.  In October he said that interest rates were “a long way from neutral” implying that the Board needed to aggressively raise interest rates.   On November 26th he said that interest rates are close to what he would call “neutral.”   The term “neutral” is that not too high and not too low state that the Fed is seeking where interest rates support an economy at full employment with its key 2% inflation rate.

Analysts are mixed on interpretation, but after his comments the Dow soared 600 points. Many believe it is likely we will still see a 0.25% increase in December, but 2019 may bring two or three increases instead of three or four.   Investors were happy to hear this.

The last week of November was a great week for the market, but it was somewhat tempered by concerns of a meeting between the President of China and President Trump at the G-20 meeting in Argentina on the week-end.

When the news from the G-20 meeting was released on December 2nd it initially pleased investors.  China and the U.S. agreed to hold the line on tariffs for 90 days.  The tariff increases slated for January are no longer on the table.  Early reports from the meeting of the two leaders indicate that an agreement may be forthcoming that could benefit both countries.  The market responded with enthusiasm on the first business day of December.

As the news began to trickle out this week some critics feel that the China deal is not as positive as the initial comments indicated.  Add to that, concerns about an inverted yield curve and the market quickly turned downward once more.

Fundamentals are strong.  Retailers are anticipating the strongest holiday shopping season in several years.  Forbes.com reported online sales over the Thanksgiving week-end that exceeded the previous year by over 23%.  All of this bodes well for the economy and the markets.

The Dow needs to cross 26,000 points to affirm that the market is on the path to recovery.  Right now it is bouncing between those levels and the lows of this year.

It is not clear at this writing which way the market will ultimately resolve the current volatility.  Should it break the lows set earlier this year, it would be a very bearish signal.

Written by Connie C. Guelich, CFP, AEP, CLU, ChFC.  This represents our view at the time of this writing and is subject to change.  This is not intended to be personal investment advice.   If you would like to discuss your own account, please don’t hesitate to call us.  We are here to help and welcome your call.

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