Jan 2, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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  • We are now living in the year 2020. That is crazy.

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"Everyone knows that if you can keep on making money, everyone's happy." - See who said it and why it matters at the bottom.

1 big thing: 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: Chair 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!"
Bonus: The Fed's balance sheet
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Data: Federal Reserve; Chart: Axios Visuals

The Fed began reducing its balance sheet in 2017, and in December 2018 Powell said the reduction would remain on "autopilot" for the foreseeable future.

  • He walked back that message in January last year when he began to backpedal on his call for "some" rate increases in 2019. (The Fed's rate-setting committee in 2018 predicted three hikes would happen last year.)

Why it matters: Simply by not reducing the balance sheet, the Fed is pumping dollars into the economy — buying government bonds and mortgage backed securities — because it replaces the assets that mature with new ones to maintain its holdings.

  • So the additional $404 billion worth of Treasuries and MBS it has added to the balance sheet since the end of August is substantial.

What they're saying: "The intellectual flexibility of the FOMC is impressive," notes Torsten Slok, chief economist at Deutsche Bank Securities.

The big takeaway from 2019 is that investors should ignore what the Fed says and watch what it does, according to Tendayi Kapfidze, chief economist at LendingTree. And right now it's buying bonds and adding significantly to its balance sheet.

Of note: The Fed held just $870 billion on its balance sheet in August 2007.

2. Catch up quick

President Trump is expected to head to China after signing the "phase one" trade deal later this month and may use the trip to push for more concessions on a new deal. (SCMP)

China's central bank announced its latest stimulus measure, cutting the required reserve ratio for commercial lenders by 50 basis points, releasing about $115 billion of liquidity into the financial system. (Bloomberg)

The FDA is planning a compromise on vaping bans, prohibiting the sale of fruity flavors in cartridge-based e-cigarettes, but not in tank vaping systems commonly found at vape shops. (WSJ)

Big pharma companies, including Pfizer and GSK, will raise prices on more than 200 drugs in the U.S. by an average rate of 5% this year, according to a new study. (Reuters)

Bitcoin proved to be the decade’s best-performing asset, having posted gains of more than 9,000,000% since July 2010. (Bloomberg)

3. It was a good, but not great, decade for the stock market
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Data: LPL Research, Bloomberg, Ned Davis Research; Reproduced from LPL Research; Table: Axios Visuals

The 2010s were a good decade for stock market investors, easily outperforming the previous decade in which returns were marred by the great financial crisis.

  • "This decade was all about [the phrase] 'don’t fight the Fed,'" John Davi, CIO of Astoria Portfolio Advisors, tells Axios in an email. "Ample liquidity + stock buybacks + little inflation resulted in US stocks and bonds dominating."
4. Midwestern manufacturing improves, but is still contracting
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Data: ISM Chicago; Chart: Axios Visuals

The manufacturing industry in the Midwest continued to contract in December, but did exceed expectations and deliver the best reading in four months.

  • The Chicago PMI, which tracks manufacturing companies based in the Chicago region, continues to rebound from October's abysmal report that showed the weakest number in four years and the second lowest in a decade.

But, but, but: The October survey's historically low number was impacted by the nationwide strike at General Motors undertaken by the UAW. That was a major factor in the surge of jobs seen in November's nonfarm payrolls report as striking workers returned to their jobs.

  • The fact that purchasing managers' indexes for the manufacturing industry did not see a similar boost in either November or December suggests the sector is in real trouble.

Plus, December marks the fourth month in a row the metric has been below 50, in contraction, and the sixth time in seven months.

  • Business sentiment fell to 46.2 in the fourth quarter, marking the lowest quarterly reading since Q2 2009.
Dion Rabouin

David Stern, who helped turn the NBA into a global, multibillion-dollar powerhouse as the longest-serving commissioner of any professional sport, died Wednesday at the age of 77.