Shares have staged a sensational turnaround in the early days of 2019, rebounding after an end-of-year tailspin that was triggered by fears of recession in the US. Three straight weeks of gains in the new year on Wall Street, and here in Australia, have erased much of 2018’s losses - the best start to a year since 1987.
So while so many of the factors behind last year’s decline still remain unresolved (like rising interest rates, growing consumer pessimism, US/China trade war, Brexit, the US government shutdown), markets now seem to be taking theses concerns in their stride.
So what’s changed? Why are markets no longer reacting to each piece of bad news as they were in late 2018?
In short, the US Federal Reserve’s sudden change in ‘tone’ since the beginning of 2019 has made all the difference, and stands in stark contrast to their ‘body langauge’ in 2018.
While last year was consumed with fears of rapid interest rate rises (and the various flow-on effects for the US economy), this year, the Fed is seeking to allay those concerns, providing soothing public assurances that they will be ‘patient and flexible’ as they decided whether to raise interest rates going forward. Music to the ears of investors.
So with a Fed Reserve less eager to raise rates, and vaguely promising noises coming from the preliminary trade talks between the US & China over thew past few weeks, there is justification for some level of optimism, and the resulting share bounce we’ve seen over the last weeks.
Does this mean we’re out of the woods? Unlikley. After an extended period of share market exuberance and economic expansion, this is a time for a degree of caution, but not outright paralysis. So invest carefully, diversify, know your personal limits, and if in doubt, get some advice.
Rick Maggi CFP