Uncertainty Easing

The S&P 500 powered through an eventful week to emerge at another record high. This week saw a Fed meeting, the announcement of partial U.S./China trade deal, and a consequential British election. These are big-ticket items that have pressured global markets for some time. If the positive reaction from global markets is any indication, the skies could be clearing.

Early in the week, the Fed met to discuss interest rate policy. Rates were left unchanged and the committee seemed to pound home the idea that this could be the case for a while. The U.S. economy is on stable footing, yet inflation remains subdued below the Fed’s targets. The Fed is free to remain generally accommodative without worrying about overheating the economy. This is a solid backdrop for the market.

In addition, a Fed on hold gives the rest of the globe an opportunity to catch up. Widening interest rate differentials have pressured the dollar higher for much of the back half of this decade. If the Fed holds steady and the global economy improves as is starting to be expected, this gap can close and the dollar can weaken. We’re seeing early indications this might be the case. The dollar is trying to break below recent trends, oil is perking up, and emerging markets are taking off. Keep an eye on U.S. multinationals and energy companies. 

On the trade front, the U.S. and China have agreed in principle to a phase one trade deal. Planned December tariffs won’t go into effect and part of the recent tariffs on $120B worth of Chinese goods will be rolled back. In exchange, China plans to increase U.S. ag purchases. This is good news, but the market wants to see the ink hit the paper in January. The trade war has certainly de-escalated, but there is still plenty of room for more substantive change. 

Across the pond, we finally have some clarity on Brexit. With the Conservative party smashing the Labour party at the polls to pick up 47 seats and a healthy majority, Boris Johnson’s Brexit deal is poised to be signed in January. It’s too early to tell what the long term implications of Brexit might be on the European economy, but the one thing we do know is that uncertainty has been reduced. There is a path forward and that can have a huge impact on economic and market stability. This notion is being reflected in the significant pound strengthening following the election. On the flip side, the Scottish National Party and two of Northern Ireland’s nationalist parties picked up seats. The Brexit debacle may simply be morphing into existential questions about the future of the United Kingdom itself. 

Uncertainty has definitely eased at the margin, but its important that markets not get overzealous. The S&P 500 might be tempted to melt up with a traditional Santa Claus rally, but there is still a consequential election on the horizon here in the states, a trade deal that has yet to be signed, and plenty of unanswered global questions. A steady grind higher remains the preferred path.