After just three full trading sessions, stocks have already seen a large amount of volatility in 2019. The Dow Jones Industrial Average dropped 660 points on Thursday with negative news from Apple sending shockwaves over the market.
The stock market saw a late spike last week, and recovery from the previous day’s selloff. In trading on Friday, The Dow Jones Industrial Average gained around 747 points, or 3.29 percent, and the S&P 500 spiked 84 points, or 3.43 percent. The main contributing factors are a strong jobs report, statements from Fed Chairman Jerome Powell, and China trade war tailwinds.
Two pieces of news out of China added to the positive market sentiment. First, it was announced that the Trump administration and Chinese leaders will be meeting Monday in Beijing to work towards a trade deal over two days of talks. This will be the first formal negotiation since President Trump and President Xi Jinping met at the G20 summit.
In addition, China announced a response to its slowing growth. It will cut the required bank reserves by one percent, over the next month in hopes of stimulating growth.
In one of the strongest jobs reports in the last decade, employers reportedly added 312,000 non-farm jobs. Moreover, wages showed gains of 0.4 percent last month. The blockbuster jobs report has reassured some analysts that, while the financial markets have been hit hard in recent months, the overall economic growth outlook remains intact. Wall Street may have been faltering and skirmishing over the last month of 2018, but Main Street remained confident.
“We expect the December employment report to remind markets that the U.S. growth outlook remains stable despite financial market volatility,” says Nomura analyst Lewis Alexander.
Also on Friday, Federal Reserve Chairman Jerome Powell stated that, while uncertainty over their next move remains high, the Fed is “patient.” Low inflation readings have allowed the Fed to operate on a stance of “wait and see.”
While his previous comments had left investors feeling dismissed in the face of a turbulent Q4 market, on Friday, he soothed concerns.
“We’re listening carefully with – sensitivity to the message that the markets are sending and we’ll be taking those downside risks into account as we make policy going forward,” said the Chairman.
He also stated that the Fed is currently able to “adjust policy quickly and flexibly.”
“We wouldn’t hesitate to change it and that would include the balance sheet. We’re hearing a lot from different groups of people about the role the balance sheet normalization may be playing in the market,” said Powell.
With many large market tailwinds evaporating, including the Trade War and the Federal Reserve rate hikes, the question in now whether the markets will get back on track and continue to grow. The truth is that this is largely unlikely. Even if we see a short-term recovery in the stock markets, the cyclical economy has reached a point of historically long expansion territory. It’s true that tax cuts from the Trump administration have given us a brief energy boost, but a recession of some size is imminent given the removal of quantitative easing.