The Christmas Eve rally continued through January 2019 and for the month global equities recorded significant positive returns. Treasury interest rates saw hardly any movement, but the risk markets of fixed income joined the rally creating positive total returns overall for bonds.
With the risk-on trade carrying the tone for January, small-cap and emerging markets led the way higher, up 11.2% and 8.8%, respectively. Helping the markets was Chair of the US Federal Reserve, Jerome Powell, adopting a much gentler tone than in his December speech. He went from what was perceived as supporting a rigid cycle of monetary tightening to a message clarifying that Fed policy is not written in stone. The Fed is now signaling greater flexibility in policy adjustments for future rate increases and ongoing reductions in its balance sheet. It may seem like semantics to some but risk assets embraced the clarification which provided insight to the development of a “Powell Put” and protection on the downside.
Where the next catalyst comes from is unclear. Investors are set to focus on earnings figures and progress with the trade dispute between the US and China will be watching closely. Global economic fundamentals have weakened in some areas but are not showing signs of a recession. The recovery in January provided a positive tone and prevented stocks from falling into bear market territory. Consumers are still confident and job growth continues to add positive support. Solutions for the trade dispute will probably be good for both sides and have some degree of positive impact on European and US economies.
A rally on Christmas Eve and the ensuing move higher may have caught some nervous investor off guard. Investors who maintained exposure to stocks and bonds participated in the January rally. We think a diversified asset allocation will continue to serve you well, especially if markets remain volatile through 2019.
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John Kirby is a Principal and co-founder of Laurentide Advisory