The S&P 500 gained 4.9% in the past week with every sector participating in the move. The Nasdaq Composite surged 5.6%, and, along with the S&P 500, registered its best week since 2011. The Dow Jones Industrial Average gained 5.1%. To put it succinctly, what a week!
Why the turn of fortune from Thanksgiving week when the S&P 500 declined 3.8%? Well, it all boiled down to a sense of hope -- and fear -- of what could be.
Hope and Fear
The hope was wrapped up in two components: the first component related to an assumption about the Federal Reserve's policy path and the second component related to an assumption about the path of the trade discussion at a Saturday dinner meeting between President Trump and President Xi at the G20 Leaders Summit.
The fear, meanwhile, was wrapped up in the stock market's stout performance, which engendered a fear of missing out on a year-end rally.
My esteemed colleague, Brett Manning, framed it well in calling Wednesday's post-Powell rally "the mother of all flat squeezes," which he clarified as follows:
"Guys who were maybe up 1-3% on the year, thinking they could just hedge away exposure and assume the benchmark closes negative, were basically forced to buy with the market move to keep from falling behind with just a couple weeks of meaningful market activity left until bonuses are assigned."
What was shaping up to be another losing month for the S&P 500 was suddenly transformed into a winning month. To wit, the S&P 500 was down 2.9% for the month entering the last week of November and closed up 1.8% for the month.
Yes, what a week!
With that, I wanted to pull together the thoughts I communicated during the week regarding the two components that took market participants for a thrill ride, which, like any good thrill ride, was both scary (if you were short the market) and exhilarating (if you were long the market).
Federal Reserve Chairman Jerome Powell appeared before The Economic Club of New York to provide a speech on the Federal Reserve's framework for monitoring financial stability. In doing so, he also seemed to call into question a framework for three rate hikes in 2019.
The stock market was already trading with a positive bias on the hope that Fed Chair Powell might offer a hint that the Fed could temper its rate-hike projections for 2019. The current baseline projection calls for three rate hikes. It appears at first blush that the market was right to be hopeful.
The major indices spiked as the newswires highlighted an acknowledgment in the prepared remarks that Fed Chair Powell sees current interest rates "just below" neutral.
What the text of the speech actually said is that, "interest rates... remain just below the broad range of estimates of the level that would be neutral for the economy." For the record, the longer-run range for the fed funds rate, as determined by forecasts from Fed members, is 2.5% to 3.5%.
Nevertheless, Mr. Powell's interest rate observation was a rally point because the language Fed Chair Powell used early last month indicated a view that the fed funds rate was a "a long way from neutral" when the target range stood at 2.00% to 2.25%.
Mr. Powell didn't say anything specific in terms of the number of rate hikes that might be seen or that he knew exactly what the neutral rate is, saying only that the Fed is not on a preset policy course and that it will be data dependent in its decision making.
By highlighting risks, though, that include previous rate increases, trade disputes, and Brexit/EU political uncertainty, the market chose to read between the lines that the Fed chair isn't wedded to three rate hikes in 2019.
That perspective shouldn't be taken as gospel. As stated above, the Fed will be data dependent, and if the data support a rate hike, then the pragmatic Mr. Powell is likely to be inclined to steer the FOMC to raise the fed funds rate as many times as necessary.
That could be one, two, three, or even more rate hikes for that matter. It is impossible to know because the future is uncertain. The speech, however, left the impression that the Federal Reserve will show some patience in monitoring the evolution of the economy in the face of rising interest rates.
From the stock market's vantage point, it was comforted by the thought that Fed Chair Powell didn't convey a distinctly hawkish-minded policy approach. He didn't in the past either, but with the stock market sell-off since early October, market participants were anxious to hear some ray of hope that it could see fewer rate hikes in 2019 than the Fed currently projects.
The tone of the speech provided that ray of hope that the tightening cycle could be less aggressive than previously imagined.
Get ready for a very busy weekend of reporting on the Trump-Xi meeting as everyone races to get the scoop. In actuality, it will likely be the primary source (i.e. President Trump) who writes the story for the market.
It is hard to imagine a "final deal" getting done. China isn't going to bend easily to U.S. trade demands, if it bends at all, and President Trump appears resigned to continue to take a hard line if China doesn't give in to U.S. trade demands.
The Wall Street Journal report on Thursday was probably as good a preview of what an eventual best-case outcome will be from the G20 meeting. The Wall Street Journal noted (unnamed) officials on both sides are floating the idea of forestalling any further tariffs through the spring to set the stage for a new round of talks to address changes in China's economic policy.
The market is anxious about the 10% tariff rate on $200 billion of Chinese goods being increased to 25% on January 1, as well as the possibility that the Trump Administration will push ahead with a plan to impose tariffs on another $267 billion of Chinese imports.
It would be a small victory for the market if there is an agreement at the G20 meeting to hold off on such tariff actions, yet it wouldn't be the ultimate solution since it kicks the tariff can down the road without eliminating the threat that further tariffs will be imposed.
What It All Means
The irony of the rally that just transpired is that it wasn't based on any concrete developments.
Fed Chair Powell didn't make any promises and all of the headline hits regarding the trade meeting between President Trump and President Xi, some of which were provided by President Trump himself, were still just fluff.
Ideally, there will be a favorable outcome from the trade meeting in Buenos Aires, but if there isn't, and there is a foreboding sense that both sides will be digging in their heels, the start of December might not look as promising as the end of November did.
Time will soon tell.
Trade matters look destined to drive trading action in the short term, but for the long term, it is the path of interest rates that is the more important directional driver on a universal front.