Fed's Dovish Shift Buoys Markets in 2019's First Weeks

By Ira Iosebashvili

A broad range of asset classes is starting the year in the green, surprising investors bruised by last year's declines in stocks, bonds and commodities.

All three major U.S. stock indexes have notched gains in the first weeks of this year, after closing out 2018 with their steepest annual declines since the financial crisis. That recovery has been led in part by rebounds in stocks that had been hard hit last year; they have rallied amid rising oil prices, hopes for a cautious Federal Reserve and signs of progress in trade talks between the U.S. and China.

A 33% year-to-date rebound in shares of Netflix has led a bounce in technology stocks, with Facebook and Amazon.com rising 14% and 11%, respectively. A nearly 13% jump in crude-oil prices, meanwhile, has lifted the shares of Noble Energy Inc. and Apache Corp., which are both up more than 20%.

Stocks in Europe and China have rallied, along with the equities and currencies of many developing countries. The MSCI Emerging Markets Index is up around 4% since the beginning of the year, while a separate MSCI Index that measures currencies stands near its highest levels since the summer.

Other commodities, such as nickel and palladium, also have strengthened. Treasury yields, which rise when bond prices fall, have moved higher, suggesting that investor worries have abated in recent weeks.

Driving the moves is a combination of factors that have taken some investors by surprise in recent weeks: Fed Chairman Jerome Powell reiterated last week the central bank would be patient in raising interest rates this year after global growth worries gripped financial markets, while minutes from the Fed's latest monetary-policy meeting indicated officials may be slowing their recent series of rate increases.

The Fed's signals came as a relief to investors fearful that tight monetary policy would hurt growth in the U.S. and abroad. Meanwhile, a strong U.S. employment report earlier this month suggested that the domestic economy continues to grow at a healthy pace, even though weakness remains in Europe and Asia.

Caroline Miller, managing editor at BCA Research, believes that a pause in monetary tightening by the Fed, combined with global growth stabilizing over the next six months, will help the performance of stocks and other assets that were hurt in last year's selloff.

"It's too early to go into a bunker," she said.

Meanwhile, signs that China is increasing efforts to spur growth are reassuring investors concerned about a wobble in the world's second-largest economy. Beijing intends to improve credit availability for smaller companies, accelerate infrastructure investment and cut taxes, officials said at a briefing Tuesday.

Many investors also have been heartened by recent signs that the U.S. and China may be making progress on a trade deal, after worries over an intensifying trade feud between the two countries shook markets last year.

"Positive signals on the China-U.S. trade conflict...add to our confidence that fundamentals are more solid than market sentiment and valuations suggest," analysts at UBS Group AG said in a note to investors. "China is one of our preferred markets within our Asia portfolios."

Plenty of investors are worried that the rebound in asset prices will be fleeting. Analysts say corporate earnings growth is poised to slow while trade talks could falter. Signs of stronger growth in the U.S. could push the Fed to moderate its recent dovish rhetoric and reignite worries over tighter monetary policy.

At the same time, investors are concerned over fresh signs that growth may be slowing more than expected in China and Europe. Industrial production in Germany dropped unexpectedly in November, according to data released earlier this month. Data showing an unexpected decline in Chinese imports and exports in December weighed on equities and commodities earlier this week.

Others, however, are betting that a dovish Fed and attractive valuations will continue lifting markets. "It would appear that the worst-case scenarios pertaining to the tumultuous geopolitical landscape are largely priced in, while heightened levels of investor pessimism have left equity markets ripe for a...bounce," global asset manager Fiera Capital said in a note to investors.

(END) Dow Jones Newswires

January 15, 2019 17:37 ET (22:37 GMT)

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