Markets took several punches last week, but they have not gone to the mat as stocks fell only modestly and remained within shouting distance of record levels.
Investors woke up Monday, September 16, to news of the attack on Saudi Arabia’s oil facilities and surging crude futures prices. Economic data from China showed weaker than expected activity in August. The Federal Reserve (Fed) had to intervene and relieve short-term funding pressures in the U.S. money markets. And, at the conclusion of its monetary policy meeting, the Fed lowered its target for the federal funds rate by 0.25%, to a range of 1.75–2%, a move that pleased some investors and disappointed others.
Fixed income markets responded well to the expected rate cut by the Fed and saw gains across the board, even as the Fed provided less conviction in its plans for additional rate cuts than markets may have anticipated. Oil prices soared after the attacks on Saudi Arabian oil facilities.
After a decade of easy money, the 2017 Tax Cuts and Jobs Act provided incentives for investment, and in 2018, the regulatory environment had eased and additional government spending programs further boosted demand. In fact, in our 2018 Outlook: The Return of the Business Cycle, we highlighted the return of fiscal leadership as a primary driver for economic and market activity. The improved growth environment led to a tighter monetary stance from the Fed in 2018, even as the contentious trade environment diminished business investment.
Fast forward to today, and the U.S.-China trade confrontation persists. The fiscal tailwinds of taxes, regulation, and spending have been no match for trade headwinds. The result: A return of central bank dominance, highlighted by the Fed, which lowered interest rates again last week.
The Fed is not alone, as the trade environment has weighed on global growth, prompting the European Central Bank, the Bank of Japan, and the People’s Bank of China all to take accommodative actions in recent weeks.
The European Central Bank has joined central banks around the world in cutting interest rates in response to slowing global growth caused by the U.S.-China trade conflict. The Bank of Japan indicated it will review its assessment of its economy and inflation next month, sparking speculation that more easing measures may be forthcoming.
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