The final days of January will likely be action packed for stock-market investors as the Federal Reserve, corporate earnings, and politics all converge to create a volatile backdrop for trading.
But no event has more market-moving potential than the Fed’s policy meeting, with investors set to parse the statement Chairman Jerome Powell’s remarks for further clues on how the central bank will navigate an economy in transition.
The Federal Open Market Committee will convene its two-day meeting on Tuesday with the market largely expecting the central bank to hold steady on rates. However, it’s not the action so much but the message that investors will be focusing on.
“Since the Fed’s December meeting, comments from Powell and other Fed members have served to reassure investors,” reiterating that further rate increases will be “data-dependent” and that policy makers are willing to be “patient and flexible,” said Mark Haefele, chief investment officer for UBS Global Wealth Management, in a note.
“Markets are now pricing in little chance of rate hikes for the remainder of the year. Inflation is probably low enough to justify keeping rates on hold, and we expect only one hike in 2019,” he said. “If this plays out, versus the Fed’s own forecast of two hikes, it should be positive for risk assets.”
He cautioned, however, that it might not take much improvement in economic data to spark renewed Fed talk about rate increases.
Ellen Zentner, an economist at Morgan Stanley, expects the Fed to replace “gradual” with “patience” in its statement and reinforce the message that it will remain flexible and adjust its policy as economic conditions warrant.
Powell will also highlight the “momentum coming into 2019, a strong labor market, and healthy consumer spending alongside softer business sentiment,” said the economist.
Latest data show that the economy remains on a solid footing despite the extended partial government shutdown as well as ongoing trade tensions with China.
Stocks are also expected to take their cue from the corporate sector as the earnings season kicks into high gear. Next week, 126 S&P 500 companies — including 13 Dow components and megacaps Amazon.com Inc. AMZN, +0.95% Apple Inc. AAPL, +3.31% Microsoft Corp. MSFT, +0.91% and Facebook Inc. FB, +2.18% — are slated to release quarterly results.
With about a fifth of S&P 500 SPX, +0.85% companies having announced earnings, fourth-quarter earnings grew 10.9% while revenue rose 6.1%, according to FactSet.
More specifically, 88% of technology companies have announced better-than-expected earnings with the group projected to report revenue growth of 6.5% and earnings-per-share increase of 13.8%, said Jonathan Golub, chief U.S. equity strategist at Credit Suisse Securities.
Positive mood aside, concerns about the trade standoff with China and its impact on the global economy are likely to cap the market’s upside, analysts said.
The market has been particularly sensitive to any developments on the trade front with investors bidding up stocks on signs of progress in bilateral talks and then selling off on negative headlines — often in the same session.
As the following chart from Joseph Quinlan, head of CIO market strategy at Bank of America’s global wealth and investment management unit, illustrates, no other countries have had as much influence on international trade as the U.S. and China with both serving as key markets for exporters.
Meanwhile, Steven Ricchiuto, U.S. chief economist at Mizuho Americas, recommended investors get used to the concept of a protracted battle between the two titans rather than a quick skirmish.
“Treat this [as] a long-term development that argues for an extended period of slower global growth in a world where excess supply is the biggest macro problem facing many key regions,” wrote Ricchiuto in a note to clients. “The problem here is not finding a deal to save face; it is a longer-term geological shift that began under the previous administration and Trump has brought it out of the shadows and to the forefront.”
That may be tough for investors to come to terms with as the trade war exacerbates a global economic slowdown that is already in progress.
The International Monetary Fund this week lowered its world economic growth outlook to 3.5% from 3.7%, citing escalating trade tensions and higher U.S. interest rates.
Michelle Meyer, U.S. economist at Bank of America Merrill Lynch, on Friday cut her forecast on first-quarter U.S. gross domestic product growth to 2% from 2.2% and trimmed second-quarter target to 2.4% versus 2.5%, mostly due to the government shutdown which finally ended after 35 days.
Meyer believes the adverse effect of the government shutdown will be eventually made up but only some of the lost spending in the private sector will be restored.
President Donald Trump said Friday he will agree to a temporary compromise to reopen the government as Republicans and Democrats attempt to hammer out a more permanent deal in the next three weeks.