Stocks rebound, all but erasing losses last year
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.
Even so, 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.
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. It wasn’t just Wall Street that worried. As stocks were sliding in December, President Donald Trump, who boasted about stocks as they rose earlier in the year, became fixated on the Fed and its chairman, Jerome H. Powell. “The only problem our economy has is the Fed,” he wrote on Twitter on Dec. 24.
“They’re trying their best to be a source of stability in markets,” said Samantha Azzarello, global market strategist at JPMorgan Asset Management. “What happened last year really shook people and their confidence in investing in equities.”
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.
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 and the confidence that those earnings are going to be sustainable.”
This past week, American companies began disclosing their sales and profits for the fourth quarter. With about 10 percent of companies in the S&P 500 posting results, the reports have been strong.
After the S&P 500 rose 2.9 percent in the week through Friday, it is up 13.6 percent from its Dec. 24 low. The stock index ended trading Friday just below its 2018 starting point.
However, earnings reports reflect only what happened in the past. When it comes to how they will do in 2019, some large businesses have cautioned that they don’t have a clear view.
Ford recently warned that the trade war and Britain’s impending exit from the European Union made it impossible to offer investors a forecast. The homebuilder Lennar did the same, blaming weakness and uncertainty in the housing market.
Broad surveys of sentiment also suggest reason for worry. On Friday, the University of Michigan’s consumer sentiment index fell to the lowest point of the Trump presidency and well below forecasters’ expectations. Earlier in the week, a report from the Fed showed that, through early January, executives and economists had become less optimistic for a host of reasons, including trade and political uncertainty and swings in the financial markets.
The data in that report came before the government shutdown had stretched to nearly a month. Now the longest in U.S. history, the closing will start to take a toll. The latest estimates from the White House’s own Council of Economic Advisers suggest that the shutdown has already knocked almost half a percentage point off the economy’s growth rate, though that drag should end once the government reopens.
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