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January 30, 2019

 The world revolves around the Federal Reserve Bank, “the Fed’s.”

     The statement accompanying the Fed’s December meeting was received as relatively hawkish, meaning, the economy is strong and can tolerate interest rate hikes. But when the minutes from the recent January meeting were released, the tone was read as more dovish, meaning, the economy is weak or slowing and may not be able to tolerate interest rate hikes. Fed speakers, including Chairman Jerome Powell, appear to have gone out of their way to emphasize that they have no preset course and that patience is warranted. The Federal Reserve has backed off some of the more hawkish rhetoric, but the risk of a monetary mistake remains.

So what happened in one month?

     Stocks staged a nice rebound following the sharp selling that culminated on Christmas Eve. Market dynamics have changed somewhat, from the “sell first, ask questions later” attitude that dominated last year’s final quarter. Many individual stocks are still getting punished for genuinely bad news—such as a few retailers’ weaker-than-expected holiday results—but for now those concerns have not translated into broader economic or stock market carnage.

     There is little doubt economic growth is downshifting and obstacles to a sustainable uptrend remain in place as 2019 gets underway. Both the manufacturing and services Institute for Supply Management (ISM) surveys declined over the past month, with the New Orders component of the Manufacturing Index (a forward looking indicator) falling sharply to 51.1—dangerously close to the 50 dividing line between expansion and contraction. These readings are concerning as a loss of business confidence can lead to a self-fulfilling prophecy. If businesses are nervous and pull in the reins, they don’t spend or hire, which leads to economic slowing; and can lead to a (inevitable) recession.

     To conclude, U.S. stocks have staged a nice rally to start the year but we don’t believe it reflects an all-clear sign. We continue to recommend investors adopt a highly-disciplined approach to asset allocation, especially around diversification and rebalancing. Risks to both the U.S. and global markets/economy remain, and we expect continued bouts of volatility.

  

The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Financial Spectrum, Inc. does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice.