Jan 2, 2020

Powell and the risk-off bull market

Jerome Powell. Photo: Alex Wong/Getty Images

The Fed’s 180-degree turn was the story of 2019, asset managers and market analysts say.

What happened: Chairman Jerome Powell and the U.S. central bank went from raising interest rates for a fourth time at the close of 2018 and giving market watchers the explicit expectation this would continue in 2019, to doing the opposite. The Fed cut rates thrice and even began re-padding its balance sheet in the last quarter of the year, bringing it back above $4 trillion.

  • "This has been a major factor underpinning markets," Quincy Krosby, chief market strategist at Prudential Financial, tells Axios.
  • "The important lesson learned is that regardless of valuations or growth trends, the policy backdrop — be it monetary, fiscal or other — can have a significant impact on financial markets," Ed Perks, CIO of Franklin Templeton Multi-Asset Solutions, adds.

Why it matters: With an accommodative Fed at its back, the S&P 500 jumped 30%, its best year since 2013 and among the strongest in recent history.

  • "One can conclude that the Fed is nimble," John Doyle, VP of dealing and trading at Tempus, tells Axios. "But you could also argue that they are watching equity prices and may even be bending to political pressure from Trump’s Twitter account."
  • The Fed's reversal prompted other central banks around the world to follow suit and what was supposed to be the year of quantitative tightening turned into widespread global policy easing.

The big picture: In 2019, just about everything delivered gains. Elliot Trexler, CIO of Global Return Asset Management, says his firm generated a 42% return while maintaining an average cash balance of 20% all year.

Yes, but: As Jim Paulsen, chief investment strategist of the Leuthold Group, points out, the bull market was a strange one, with the U.S. stock market led higher by typically defensive investments like high-dividend stocks, consumer staples and utilities.

  • Traditional safe havens like gold and municipal bonds also performed well, with munis recording all-time high cash inflows and equity funds seeing record outflows.
  • "I have never witnessed a ‘risk-off’ bull market — one driven not by optimism, but by a chronic fear of a collapse and recession most of the year," Paulsen says. "It wasn’t FOMO which led one of the strongest stock market years ever ... it was FEAR!"

Go deeper: The market will need the Fed again in 2020

Go deeper

The Fed plans to keep pumping cash

Illustration: Aïda Amer/Axios

The New York Fed added $83.1 billion in temporary liquidity to financial markets Thursday, and the U.S. central bank looks primed to keep pumping cash for at least the next few months.

Why it matters: The stock market's 30% gain in 2019 was in no small part backed by the Fed's decision to cut U.S. interest rates three times and inject more than $1 trillion of temporary financing into the repo market. It also added more than $400 billion to its balance sheet in the fourth quarter.

Go deeperArrowJan 10, 2020

Dallas Fed chief: Bond-buying program likely helping to boost stocks

Photo: Jonathan Newton/The Washington Post via Getty Images

The bond-buying program the Fed began in September, which has added more than $400 billion to its balance sheet, is likely helping lift the stock market and other asset prices, not unlike its previous quantitative easing program, Dallas Fed president Robert Kaplan said Wednesday.

What he said: “My own view is it’s having some effect on risk assets,” Kaplan said in an interview with Bloomberg.

Go deeperArrowJan 16, 2020

Fed may address bond-buying program following repo market stress

Data: Federal Reserve; Chart: Axios Visuals

The Fed's balance sheet shrank last week with holdings touching their lowest level since mid-December, the strongest decline since the Fed restarted its bond-buying program in September.

Why it matters: The Fed will likely have to address its longer-term plans for liquidity injections to the repo market and the program that Chairman Jerome Powell has insisted on referring to as "not QE," but many market participants have dubbed "QE4," or the fourth phase of quantitative easing.

Go deeperArrowJan 28, 2020