The wind of Wednesday’s rally was momentarily taken out of the sails in U.S. equities on Thursday as the Dow Jones Industrial Average fell over 100 points while investors await the results of a G-20 Summit meeting between U.S. President Donald Trump and China president Xi Jinping.
The markets reacted negatively as President Trump spoke with reporters at the White House prior to his departure to the meeting in Buenos Aires where he was tepid about a possible trade deal.
“I think we’re very close to doing something with China but I don’t know that I want to do it,” Trump said. “Because what we have right now is billions and billions of dollars coming into the United States in the form of tariffs or taxes, so I really don’t know.”
After a tumultuous October that saw massive sell-offs, particularly within the technology sector, and more sell-offs spilling over into mid-November, investors are hoping for a year-end rally to cap off 2018. A trade deal between the two economic superpowers can certainly be the trigger event “that would set us up for a Santa Claus rally,” said Robert Pavlik, chief investment strategist at SlateStone Wealth. “Powell’s comments were the bandage the sleigh needed. Now you have to get the sleigh back in the air so Santa can deliver those presents. That’s what this weekend is all about.”
Post-Powell Speech Rally
The markets were lifted yesterday with investors hanging on every word of Federal Reserve Chairman Jerome Powell’s speech at the Economic Club of New York where he said that rates are “just below neutral.” Markets responded positively with the Dow gaining over 600 points.
“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth,” said Powell.
Powell noted that the economy is “near max employment, price stability” and major asset class valuations are “not far in excess,” which could mean there may be more room to run for U.S. equities. Furthermore, Powell states that the economy is growing “well above most estimates” and that “there is a great deal to like about this outlook.”
The CME Group’s FedWatch Tool, an algorithm that calculates the probability of a rate hike in a given month, is now showing an 82.7% chance the Federal Reserve will institute a fourth rate hike for December. Powell’s latest comments come as various Fed members signaled dovish tones to various media outlets.
“This is perhaps an overreaction to what was hardly a binding promise to reconsider the path of future rate rises, but at the very least it did remove any possibility of a more aggressive policy being signaled at the December meeting, and opened up the possibility of a pause or halt to rate hikes taking place in the first half of 2019,” said Michael Shaoul, chairman and CEO of Marketfield Asset Management.
Related: Jim Cramer: Markets in ‘One of the Worst Times in a Long Time’ as Yields Rise, Stocks Fall
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