Managing ‘euphoric momentum’ as well as rate hikes
Quite a lot has happened in our economy since the Fed’s last quarter-point rate increase a year ago. That hike was the first following seven years of what I believe is the most accommodative monetary policy period in U.S. history, starting us on a path that seemed relatively clear for a successive string of rate “normalizations” at the tail-end of 2015 and beginning of 2016.
Unfortunately, over the ensuing few months, a string of hiccups threatened to derail the economy, markets and what was then a still budding rise in consumer confidence. What followed over a relatively brief time span were headline fears of a recessionary redux and, just as quickly, the start of a roller-coaster ride in the global financial markets. Fast forward to today, global economic fears have subsided, investor confidence has rebounded (as have the financial markets), the unemployment rate is now at a nine-year low and, most recently, OPEC’s agreement to “coordinate” oil flows should provide a new (and potentially higher) floor price for oil, at least until the next Mideast squabble.
Investors are closely parsing the Fed’s post-meeting statement, which seem to set the stage for the next round of interest rate management. By week’s end we’ll have a good idea as to how the message was received.
For now, euphoric momentum seems to have maintained its grip on the U.S. investor. Small-cap stocks have become the darling of investors, up over 16% following the election, most likely as a result of investor concerns for restrictive trade rhetoric and a rebounding dollar. This makes sense given FactSet’s note that ~80% of the Russell 2000’s collective revenue is U.S.-centric (leveraged to tax reform, deregulation and infrastructure spending).
There is certainly good news in the pipelines these days, both domestic and overseas. Holiday sales seemed to have improved through the second half of November, while a number of economic surveys are noting improved consumer demand, post-election. There also appears to be a pick-up in business spending metrics after the pre-election lull, with better loan demand reported, an improved job picture and rising consumer confidence. Overseas, China’s trade picture seems to have rebounded, the European Central Banks continue their liquidity float, and lately emerging markets have shown some signs of economic stabilization (thank you, oil prices).
The big picture for the past 10 years is in the direction of investor flows (bonds versus stocks). The $1.5 trillion in movement into bonds funds may be changing momentum over the next few years. Central banks aren’t quite as likely to be as accommodative as has been the case over the past several years and corporate profits may be ticking more positive. Maybe.