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“Stocks are falling. I’m buying them anyway.” – 12/4/18

Posted December 5, 2018

The above is a quote from Jeff Sommers as the title of his 11/18/2018 “Strategies” column in the New York Times. He keeps buying stocks even when they are falling because he has “faith in the future.” What is the basis of his faith? It might be the history from 1926 through September 2018 that the average U.S. Bull Market produced a cumulative return of 480%; and that the average U.S. Bear Market produced a cumulative loss of -41%.

Two Words from Fed Chair Powell Make a Huge Difference
The Federal Reserve Bank has a dual mandate as authorized by Congress: provide for maximum employment and produce price stability. For the first mandate, the Fed will stimulate the economy with low interest rates to produce growth. For the second mandate, the Fed will slow growth by increasing interest rates to prevent runaway inflation. Currently, the Fed is searching for a neutral interest rate that will neither spur nor slow economic growth. In early October, Mr. Powell described the Fed’s benchmark interest rate as a “long way” from neutral. That remark helped send stocks sliding, out of concern about tighter financial conditions that could slow economic and profit growth.

In remarks before the Economic Club of New York on Wednesday, November 28, Mr. Powell said interest rates are “just below” neutral, and this remark sent stocks soaring higher. It appears that Mr. Powell wanted to retreat from his “long way” comment in October. In further comments on November 28, Mr. Powell indicated the Fed may be ready to pause and assess the effects of its actions so far. This is good news for the stock market, because it reduces the threat that the Fed will raise interest rates too fast.

Two Positives that are Most Important to the U.S. Stock Market
One is the new flexibility in Federal Reserve policy to assess the economic data before marching ahead with more interest rate increases; and two is a 90-day truce in the trade war between the U.S. and China agreed to by President Xi and President Trump on December 1. This environment of possibility helped to produce gains for U.S. stocks and bonds in November. Data shows that the U.S. consumer is strong, and inflation is subdued, which produces a Goldilocks economy running not too hot and not too cold.

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