There are always multiple causes for market moves, but the last couple of months of volatility looks to have been principally about two fears: rising rates and escalating trade tensions. As we enter December, it seems that those fears have been banished.
The market reacted positively last week to a speech from Fed Chair Jerome Powell and Presidents Trump and Xi emerged from a side meeting at last weekend’s G20 Summit announcing a truce in the trade war.
So, those problems have been solved ... or have they?
The clearest answer to that question is regarding trade, where there has been a clear change according to the agreement that was reported over the weekend. There is no “trade deal” per se as such things typically take months or years to negotiate, but there is at least an agreement to halt the escalation of tariffs. The devil though is in the details, or rather the lack of them.
It should come as no surprise to anybody following this administration that there are multiple versions of what the deal contained. Donald Trump hailed it as “one of the largest deals ever made” and claimed that China was essentially backing down. It is to be expected that the Chinese version of events is somewhat different, but they were not the only ones whose interpretation of the deal differed from the President’s.
As pointed out here, the official White House statement was also much more circumspect.
It seems that things panned out pretty much as I anticipated when I wrote this article last week. Donald Trump needed a win, so a deal was likely, and any agreement was going to be spun as such. The market has bought in for now, with futures indicating a significantly higher opening this morning, but it remains to be seen if there is enough substance here to reverse the direction of the stock market.
The chances of that are increased by the other positive event last week, a seemingly softer line from the Fed on rate hikes. Powell’s speech didn’t really contain anything different from what FOMC members have been saying to date but there was a change of tone that traders and investors saw as meaningful.
Until last week, Powell had simply said that the Fed was on a gradual path to “normalization” of interest rates, without any indication of what was considered “normal.”
That changed on Wednesday though, when he said that they are “just below the broad range of estimates of the level that would be neutral for the economy.” That suggests that there is an end in sight to the series of interest rate hikes that have roiled the market, and stocks responded with a massive jump. One could make a strong case that nothing changed on Wednesday. The Fed has not announced an end to rate increases, nor said specifically when that will come, but that is not the point.
In both cases, trade and rates, what matters for now is not the actual effects of the news. Both Trump’s announcement and Powell’s speech give the market what it wants: hope. This move has, as I have said here multiple times, been about fear, not reality. In markets, fear often becomes a self-fulfilling prophecy, as the selling it generates begets more selling. When there is hope, though, the opposite is true.
What we have seen over the last few days doesn’t really solve any problems. There is no comprehensive trade deal with China and the Fed is still almost certain to hike rates again this month. What has happened though is a shift in the market’s perception of what is to come, and in markets, perception is reality, so a sustained rally through the end of the year looks likely.