If you're one of those investors who is desperate for clarity on the stock market’s path and a return to less volatile price swings in 2019, you’re in for a rude awakening. You’re not going to get it.
I’ve spoken incessantly about the rash of “panic selling” that occurred in the last three months of 2018, which, to me, created extraordinary buying opportunities for investors (like yours truly) with long-term views. It goes both ways, however. There is such a thing as “panic buying,” where stocks rise with as much velocity as we have seen with the declines.
Friday’s market surge — albeit a much-needed rebound from Thursday’s decline — was a prime example of panic buying. The Dow Jones Industrial Average benefited from a more than 750-point surge, while the Nasdaq Composite Index added 4.4% and the S&P 500 index climbed 3.4%. Not only did the number of stocks that climbed compared to those that declined was at a ratio of around 10 to 1, the volume in rising stocks were also proportionally higher.
You can attribute any number of reasons to the rebound and you would be correct. Progress in U.S.-China trade negotiations, a clearer picture of the Federal Reserve’s policy intentions, corporate earnings, etc., are the typical headline reasons. But there has been no new developments on any of these topics — not to such an extent we know more than we did, say, three months ago when the rollercoaster ride began.
What is clear is that the stock market lacks clarity and direction. And we can debate whether it had any clear direction at any point in the second half of 2018. Friday’s gain was aided, in part, by the fact that there is a hint of the Federal Reserve’s policy intentions going forward.
"We're listening sensitively" to the markets' concerns about risk, Fed Chairman Jerome Powell said in an interview at the American Economic Association meeting. "Market are pricing in downside risks, and they're well ahead of the data.”
Investors have become, understandably, anxious about the path the central bank will take with regards to monetary policy. And it hasn’t helped that President Trump hasn’t fully endorsed Powell’s job security, given the market’s recent downturn. And that’s putting it mildly. While Powell’s comments suggests the Fed will be flexible about future monetary policy moves, it still lacks clarity about which “data” the Fed will focus on the most.
Sure, there are signs that the global economy is slowing. Powell also seems intent on doing his job to tame inflation. "U.S. data seem to be on track to sustain good momentum into the new year," Powell said. He’s right. On Friday an official read of employment data showed that a better-than-expected 312,000 jobs were created in December, compared to the 182,000 jobs economists were expecting.
But is the good news really good news?
While the positive jobs report and rising wages should have assuaged investor’s concerns of a slowdown in the U.S. economy and laid to rest fears about a looming recession, it makes Powell’s job more difficult.
"We will be patient as we watch to see how the economy evolves,” he said.
But is he also watching the stock market and responding to the volatility? Of course he is. And that only adds to the confusion of what category of “data” matters most to the Fed and the relevance of such data and its effect on stocks.