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Welcome to 2019 and one perplexing state of affairs in the financial markets, fed policy and the US economy.  As we left off our last market commentary, we stressed the danger of aggressive Fed policy and trade activities on the plight of the US Equity sector.  We all saw the tumultuous state of affairs and the massive volatility in both the Equity and Fixed Income sectors as Stocks got pummeled and Treasuries rallied in light of the aggressive declines in stock prices.  At this point we’d like to provide some clarification as to what is transpiring.

Firstly, we feel the Federal Reserve had justification for the last hike in December, however the forward guidance was simply too aggressive given the sensitivity of US Equities and therefore was a gaffe.  Unfortunately the Fed was simply way behind the curve in raising rates and should have begun tightening back in 2016 with a gradual progression.  The policy of playing catch up in the 8th inning is a recipe of bubble bursting and extreme volatility.

That said, the US economy is in the state of an historic transition, where defensive trade policies have both negatively affected valuations of some companies but also helped spur robust job growth in the US, as companies are returning operations to the US and those who planned on outsourcing have stayed put.  The result has been some negative earnings and guidance from some major players (e.g. Apple), and downside pressure on Stocks, while robust employment growth is painting an opposite picture.  Here we sympathize with the Fed who must keep a watchful eye on Stock market stability while also managing an overheating job market and inflation in the pipeline.

The historic transformation in the US economy that is occurring is the creation of a more robust domestic US economy that at some point will be less reliant on the appreciation of financial assets (e.g. stocks) for growth.  Real job creation and wages for a greater portion of the labor market should dictate the state of health of the US rather than speculative appreciation in Stocks.  However, this transformation will take time and will involve continued volatility as some companies experience the negatives of trade tactics while domestic job growth should remain robust.

For the Fed….this is a tightrope to balance.  Our thoughts ?  Be ready to tap on the breaks as necessary, however mitigate forward guidance and adopt a “hike as is necessary approach”.   If Stocks can build a value zone in the current region and if employment continues to surge…yes, it’s time to tap on the brakes again. 

Put on your seatbelts….this economic transformation will take some time but it’s a good thing.


Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR


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