“Schizophrenia has its paradises, in the same way as its hells and its purgatories”, reflected the famous writer Aldous Huxley, something that the international financial markets are perceiving in all their dimensions. Because moving from the most feared “hell” to the least expected “paradise” in just 60 days speaks of the state of imbalance and anxiety in which today the analysts, operators and investors are immersed. If at the beginning of December everyone expected the catastrophe in 2019, two months later they are euphoric for the best start to the year since 1987.
The numbers speak for themselves: in January, the S & P 500 index gained 7, eight%, while the Nasdaq of technology stocks grew by 9, three%. And the results are even better if measured from Christmas 2018: + 15.1% for the S & P 500 and + 17.7% for the Nasdaq. But you can even say the same in the other major bags: all breathed when they saw that the end of the world was postponed. As former president Carlos Menem said, “nobody dies on vespers.”
Is that the financial picture looked much darker at the end of 2018. Because the trade war unleashed between the US and China in March last year ended up hurting the expectations of all markets, with an understandable concern for 2019, against the risk deceleration of the world economy and political shocks, such as the one suffered by Argentina with the exchange rate run and subsequent mega-devaluation of the peso.
On the other hand, the decision of the Federal Reserve to deepen its restrictive monetary policy, with periodic increases in the benchmark interest rate, was another sign that the generation of cheap money, which had largely enabled the longest bullish rally in the history of Wall Toll road. And financial markets badly accused that removal of “anabolic”. Because life without additional stimuli can become very hard when you get used to them. In this case, the famous “steroids” were the successive programs of “Quantitative Easing” (QE), the ultra-expansive monetary policy that the Fed and the European Central Bank launched to avoid the collapse of the US and European economies, respectively. , after the subprime crisis of 2008.
What happened so that the “humor of the markets”, that phrase that is used as a hose in almost all the notes of finances, will change so significantly in less than two months? The analysts justify it by the coincidence of four factors, as if they were planets aligned.
First, the Fed changed its way of seeing the future. Even some malicious spirits might think that their boss, Jerome Powell, could have sacrificed a bit of the independence of the organization in exchange for President Donald Trump stop taking him as a scapegoat.
“The problem comes from the Fed, which is making the mistake of being so strict, I think it went crazy,” said the tycoon with his explicit baroque style, furious because his officials had set the interest rate on a floor of 2% . “The economy is at record levels and I do not want to slow it down even a little, particularly when we do not have problems with inflation,” he explained in a television interview.
Powell understood the message and went out to say what all the markets were eager to hear: “We will be patient while we see how the economy evolves”. That reassured investors, who feared the Fed would cool the economy too fast. Above, James Bullard, president of the Federal Reserve of St. Louis, was even more explicit: “Patience, for the Fed, can represent a good couple of years.”
The second part that allowed the January stock rally was how solid the US economy is. The good employment data and the rebound of the ISM production index show that the country continues to grow at a good pace.
In that sense, the negative expectations of December could be interpreted as an overreaction of the markets, which bet on the beginning of the bearish cycle in the stock markets and believed that economic growth was going to slow down. As the famous phrase of the Nobel Prize Paul Samuelson says, “The stock markets anticipated nine of the last five recessions”.
In addition, the commercial conflict that broke out in 2018 between the US and China could reach a solution in the coming months. At least, that is the vision that the markets have today, which does not mean that they have the crystal ball. But Ninety’s truce, which was granted by both governments to sit down to negotiate, is a hope for all, aware that, without agreement, both economies end up losing. And that Trump needs a commitment to exhibit it as a political triumph, facing his reelection in 2020.
Finally, the good results of the fourth quarter of 2018 that were published in the US “brought tranquility to the stock market”, confirming here also that the fundamentals of US companies remain solid. As one Barclays bank report noted, “Investors were very cautious about quarterly results and their expectations had been reduced aggressively.” Again, the overreaction before a scenario that was unsightly glimpsed. Anyway, despite the euphoria, nobody is willing to go out to celebrate. An absolutely schizophrenic scenario.