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A Swift Shift in Sentiment Leaves Investors Wondering What’s Next for Markets?

Just one week after surging to their best weekly gain in years, U.S. stocks gave almost all of it back last week, suffering their worst loss since March. It was a curious week to say the least. After receiving some reassuringly dovish commentary from the Fed the week before, stocks were poised to rally further on word from Buenos Aires of a cease fire on the trade front with China. And it came. But the rally faded quickly, lasting only through Monday, after which stocks turned sharply lower. The S&P 500 lost 4.6 percent on the week, leaving it lower on the year by 1.5 percent and back in correction territory from its high on September 20.


What Does Trade and the Latest Fed News Mean for Investors?

The U.S. and China agreed to a cease fire in their ongoing trade war. Following a meeting of the two sides on Saturday evening at the G 20 meeting in Buenos Aires, the U.S. agreed not to impose any new tariffs for ninety days, while the two sides continue to negotiate. Unless substantive progress is made, the agreement will expire on March 1 of next year. The agreement not only delays the expansion of tariffs to all Chinese exports to the U.S., but also somewhat unexpectedly includes a delay in the scheduled increase on January 1 to 25 percent from the 10 percent tariff already in place on $200 billion of Chinese exports. Ninety days is unlikely sufficient time to fully resolve the differences between the two sides, but the agreement is a constructive step that can be extended beyond the March 1 expiration if sufficient progress is made and should be viewed as positive by markets.  

Is the Fed Ignoring Signs of Rising Risks and Slowing Growth?

Since Fed chairman Powell said the Fed funds rate was a long way from neutral on October 3, the S&P 500 has fallen 10 percent, capped off by last week’s 3.8 percent decline. But interest rates have also declined. The two-year Treasury note has dipped 4 basis points to 2.82 percent, and the ten-year yield has dropped from 3.18 to 3.04 percent, compressing the 2-10-year yield curve by eight basis points to 23 in the process. While the Fed has continued to focus on the inflationary implications of late cycle fiscal stimulus and a 3.7 percent unemployment rate, markets have been sending a different message, focused more on the rising risks to the pace of economic growth, both at home and abroad. 

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