Ever since Jerome Powell changed the trajectory of interest rates, the stock market has rallied. But there are risks that remain.
The most recent market low occurred on December 24 of last year, when Federal Reserve Bank Chairman, Jerome Powell, hinted of higher interest rates. Fears of aggressive interest-rate hikes led the stock market to tumble almost 20% from its October 2018 peak. Many investors were left worrying they may have overspent on holiday gifts.
After this quick and severe drop, Mr. Powell dramatically changed his tune. Some pundits wondered how much the jawboning from 1600 Pennsylvania Avenue led to the change in policy. That seems unlikely given the subsequent statements by multiple Federal Reserve Bank members and Fed’s fierce desire to remain independent.
Stock investors cheered this change in tone from The Fed, and the S&P 500 index had a strong final week of 2018, followed by a 13% gain in the first quarter of 2019. For those who follow market history, every time the S&P 500 scored a gain of 10% or more in the first quarter of a year since 1935, the market managed to climb up 6% more on average for the rest of the year, with positive performance 11 of the 12 times. Another interesting statistic is that every post-mid-term election year since 1950, has been positive for stocks. So barring a precipitous drop, history is on the side of stocks—at least for another 7.5 months.
The relaxed interest-rate policy has reignited life into the longest bull market in U. S. history. Fortunately for investors, bull markets don’t die of old age. As our friends at JPMorgan are fond of saying, three things that most often create bear markets are extreme valuations, interest-rate hikes, and commodity spikes. As of now, none of these look to be a threat.
