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Commonly accepted among stock market pundits is the belief that stock markets predict our economic future by six months or more. Although historical data shows that the market has only about a 50/50 track record in that regard, recent market volatility has had the media pundits actively promoting that theory.

In December, the markets were screaming the “imminent US recession” story and had everyone just about convinced that the Fed had over-tightened the economy, causing a slowdown. Granted, the political environment was creating considerable anxiety and the economic data, particularly from the housing and auto industries, was somewhat softer than it had been, but no professional economist that I am aware of was predicting a recession within the next year. Still the market plummeted.

But what happened on December 26? The market (Dow Industrial Average) surged more than 1,000 points, starting one of the most impressive rallies in decades. It was as if someone flipped a switch and declared the recession scare over, with the market back in rally mode.

So, what changed?!!


As I mentioned in our January letter, the Fed had been relentlessly raising interest rates and “normalizing” their balance sheet over the past four years. Up until recently, the markets have taken the increases in stride and the Fed has shown no signs that it intended to slow the tightening. At some point, though, the Fed actions were going to cause a slowdown, and the markets were beginning to show discomfort with the relentless rate increases.

Meryl Witmer, one of Barron’s annual Round Table panelists, suggested in their recent market discussions that “some say that the staff at the Fed has a huge amount of animosity toward the President and because of that the staff is pressuring Powell to continue hiking rates.” Hmmmm…could the Fed staff actually be influenced by their personal political views?

You might have come to that conclusion if you were to look at the backgrounds of the voting members of the Fed’s Open Market Committee (FOMC) which makes the Fed’s policy decisions. Prior to December 31, the FOMC didn’t appear to be a group inclined to do President Trump any favors. Fortunately (for the markets), on January 1 four new voters joined the FOMC, replacing four members who retired from the voting committee. The changes to the FOMC appear to be more favorable to the markets.

Coincidentally, on December 19, Fed chief Jerome Powell finally revealed the possibility that rate increases might not be on “auto-pilot” and would actually be data-dependent as they had been saying all along. And on January 4, Chairman Powell sounded like a different person, stating that “we’re listening sensitively” to the markets’ concerns about risk. “We’re always prepared to shift policy and shift it significantly” if need be he continued…almost a 180-degree change.

Apparently, the Fed changed, and the markets responded accordingly.


As our October Crouch Connection suggested, there are several similarities between our recent markets and the markets of the mid-1990s. As a reminder, a photo of the July 1995 U.S News and World Report magazine cover was included, with the cover screaming “Time to Bail Out?”

The cover story went on to say that “prudent investors will ignore the bulls – for now – and stay on the sidelines”. The magazine’s advice couldn’t have been more untimely. At the time, the Dow was at 4,702, but by the end of the decade, the market had not only doubled, but the Dow was over 11,500.

What was not understood at the time was that the personal computer, the adoption of the internet, and the growth of the semiconductor industry created unprecedented economic growth in our economy without the inflation that would have normally been expected. Without inflation, the Fed had no reason to raise interest rates and slow the economy into a recession.

The global growth that has been occurring since the turn of the century has exposed the world to the possibility of a life similar to what we enjoy in the U.S. Television and the internet have exposed billions of people to products and experiences that they never knew existed a few years ago. At the same time, inflation can’t break out like times past because no company can raise prices indiscriminately without a competitor around the world offering a competing product at better prices…the internet has leveled the playing field!

Like the late 1990s, we have disruptive technologies that could easily allow economic growth to continue at the same time we have dynamics that will probably keep inflation at bay for the foreseeable future! If our President is successful in settling the trade issues with China, we could experience an explosion of growth similar to the late 90s.


Although there is uncertainty being created by the ongoing trade war and the possibility of another government “shutdown” on February 15, the markets seem to believe there will be positive outcomes to both of these issues. I suspect that we will see progress on both issues as the year develops and a significant resolution to the China issues will result in a very positive stock market later this year.

“Predicting rain doesn't count. Building arks does.”

-Warren Buffett


Either way, we work every day to examine every investment available and structure our clients’ portfolios to survive any short-term volatility and perform well over the longer term. As we always remind you, please call if you need any reassurance that your portfolio is positioned to meet your financial needs. We always enjoy your calls.


Dave Crouch Kim Blackburn Kay O’Connell

Registered Principal Branch Operations Manager Research Assistant

Financial Advisor Financial Advisor

Any opinions are those of Dave Crouch and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.

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