Finance News

The Stock Market Is Making a Comeback. Was It Something the Fed Said?

In early January, the Federal Reserve chairman, Jerome H. Powell, said the Fed was listening “sensitively” to the markets. Stocks have risen just over 9 percent since. CreditCreditJim Young/Reuters

By Matt Phillips

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 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 J. P. Morgan 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 United States 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 on 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 United States 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.

The shutdown is affecting some large businesses already. On Tuesday, Delta Air Lines cautioned that reduced travel by government officials and contractors would hurt its sales growth, at a rate of about $25 million a month. JPMorgan Chase executives noted that if the Securities and Exchange Commission — currently closed except for emergency matters — was not able to give approvals for stock market share offerings, and mergers went unapproved by other government agencies, it could cut fee revenue for its investment banking operations.

Profits at American companies may be hurt by the United States’ trade war with China. Evidence that it is slowing global growth mounted this past week, with Germany reporting its slowest annual growth rate since 2013 and China saying that exports fell last month.

Companies in the S&P 500 generate 37 percent of their sales, on average, from markets outside the United States, according to the data provider FactSet, and businesses that have increased their exposure to global economies now look vulnerable.

But for the most part, stock investors have shrugged off these concerns in January, now that they see the Fed as less eager to raise rates.

The Fed had spooked investors as recently as Dec. 19, when it raised interest rates, and its chairman, Mr. Powell, said he didn’t see a need for the central bank to change the way it has been slowly selling off the bonds it bought to bolster the economy over the last decade. The stock market slid 6 percent in the days afterward.

“Clearly the market was skittish about, primarily, the Fed,” said Alicia Levine, chief strategist at BNY Mellon Investment Management. “It sounded like the Fed was on autopilot.”

By Jan. 4, Mr. Powell’s comments had a different tone. Speaking at a public panel discussion, he made a point of emphasizing the Fed’s ability to be patient with further interest rate increases, given that inflation remains low.

“We’re listening with, you know, sensitively to the message that — that markets are sending,” Mr. Powell said. “And we’re going to be taking those downside risks into account as we make policy going forward.”

Within days, other central bank officials repeated the sentiment, and the Fed published the details of its December meeting, which showed that many of its policymakers had already reached that conclusion. Stocks had already bounced off their Christmas Eve low when Mr. Powell spoke, but have gained 9.1 percent since.

“Their commentary has really done a 180 in a really short period of time,” said David Giroux, chief investment officer of United States equity at asset manager T. Rowe Price.

Over the last 30 years, investors have grown accustomed to looking to the Fed for help when the market found itself in a sticky spot. Some trace the phenomenon to the October 1987 market crash. The morning after stocks tumbled roughly 20 percent in a single day, the Fed, under the recently appointed Alan Greenspan, issued a statement indicating that it was ready to support the economic and financial system.

Stocks rebounded sharply, helping to embed an expectation into the markets that continues today. And, in the past decade, as stocks have climbed in their longest run of gains ever, the Fed’s decisions to back away from plans to raise interest rates or withdraw economic stimulus have helped keep the bull market alive.

Mr. Powell and the Fed seem to have done that again.

“I think his comments on Jan. 4 were critical to getting excitement and willingness to invest back into the market,” Ms. Levine said.