Economic and Stock Market Commentary for the week of November 20, 2018

Alex Ralicki |

Wall Street is keeping a closer eye on the Federal Reserve, especially after its policy making committee suggested it would resume hiking borrowing costs rather soon. The Fed cited continued strong economic growth and a persistently low jobless rate as arguments for raising rates at its December meeting. We also expect it to hike rates as many as three times in 2019, as it edges toward a neutral policy stance. That would take interest rates above 3%. Any move past that level would signal the Fed’s intention to slow the business advance, a shift that would sit poorly with investors.

Congress and the White House also will bear watching, following a midterm election that yielded the first change in party rule in the House of Representatives in nearly a decade. Whether that shift leads to a greater commitment to infrastructure spending, changes in tax priorities, or revised regulation is unknown. Political uncertainty may well intensify, as the shifting makeup of Congress and changes in Administration personnel may lead to more infighting.

Other concerns have lingered, with festering trade issues (especially with China) and falling oil prices (which have sparked fears of a deepening global economic slowdown) heading the list of worries offshore.

Politics aside, the business outlook remains bright on our shores, with most companies continuing to outperform expectations and with the economy, which remains on a relatively fast track, likely to advance at a generally healthy pace in the current quarter and into 2019. Meanwhile, we think the business expansion can handle a neutral policy stance by the Fed. In all, unless inflation heats up unexpectedly, the bank should not be forced into more aggressive monetary action that would further unsettle investors.

For now, the bulls and bears are making their respective statements, with the periodic sharp selloffs often being countered by subsequent buying. All the while, equities remain at historically high levels.

Conclusion: We think this unsettled trading pattern will continue for a while, likely leaving the bull market intact, but keeping stocks subject to unnerving volatility. As before, we recommend investors seek out quality issues.