A Dissipating “Axis of Worry”
Many of the concerns that caused the steep drop in the stock market in the fourth quarter of 2018 have started to dissipate. The combination of rising interest rates, a trade dispute between the U.S. and China, lower oil prices, and the U.S. government shutdown all rolled into what we have referred to as the “Axis of Worry”. We have viewed many of these issues as transitory.
Since the start of 2019, investors have begun to shrug off this Axis of Worry and we have seen the S&P 500 Index increase 8%. Investors like certainty and positive developments drive market returns. Some uncertainties remain, and that tug-o-war is likely to impact market volatility over the next few weeks.
Fed on Hold: The Federal Reserve did not raise short-term interest rates this week and reiterated they would be patient and data dependent on future rate increases.
U.S.-China Trade: The current trade cease fire is set to expire March 2nd. At that point, previously announced tariffs are expected to go into effect. The current view is that Presidents Trump and Xi will meet prior to the expiration and work out a new trade agreement.
Oil on the Rise: After falling 38% in 4Q18, oil prices have gained 22% year-to-date. A combination of lower OPEC and Russian output, sanctions on Venezuela, hopes for an end to the U.S.-China trade dispute, an improving U.S. economy have all contributed to optimism for oil prices.
U.S. Government / Two Weeks Notice: The partial U.S. government shutdown ended on January 25th. The partial shutdown is schedule to resume on February 15th unless a further compromise is reached. Stay tuned…
In addition to these Axis of Worry issues, the big news for the week was the January employment report which showed that the U.S. created 304,000 jobs in January. This was well ahead of expectations.
Dissecting Headlines: Understanding Hawkish and Dovish
For the last 2 years, the Fed has slowly increased short-term interest rates in an attempt to return rates to historic norms. Much has been speculated on with regards interest rates, and so the terms “Hawkish” and “Dovish” are often used to describe the disposition of the Federal Reserve or its officials.
“Hawkish” describes an action or disposition to raise interest rates. Increasing rates is meant to curb inflation. This can increase the cost of borrowing and can tighten economic conditions. The moniker “Hawkish” implies a posture of aggression and threat.
“Dovish” conversely describes the action or disposition to decrease interest rates. This is meant to stimulate a stagnant economic environment.
The Fed’s current stance to slow or stop interest rate increases has moved it from a Hawkish position to one that is more Dovish.
Want a printable version of this report? Click here: NovaPoint Feb 4 2019
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