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Optimism Amid Disorder

January 28, 2019

|Daniel A. White

There is reason for hope.

Even as stocks fell on seemingly good news from the Federal Reserve, and Christmas Eve featured calls to banks asking if they have enough cash, the last few months show that the indicators driving the late 2018 stock market sell-off are improving.

For one, the Fed is less hawkish. Rates are still going to increase this year, but at a reduced clip. That should encourage investors and markets alike.

Bond yields have also rolled over. They increased to a 3.4 percent return on 10-year bonds, but have dropped to 2.77 percent since.

Similarly, oil prices have stabilized. Crude oil was up to $76 per barrel in October 2018. But since then, prices have dropped more than 30 percent, ushering in relief at the gas pump.

Also encouraging is the stalemate in the U.S. versus China trade wars. Even if the hold is only temporary, it seems clear both sides seek solutions. While uncertainty abounds, negotiating is better than all-out war.

Staying on the international front, the fact that the Italian government reached a budget accord with the European Commission is positive. Yes, the can may have been kicked down the road, but at least the agreement has calmed markets in the near-term.

Lastly, the crazy valuations in the stock market are becoming saner. The price-to-earnings ratio (PE ratio) for the S&P 500 was near 21 in October 2018. Today, it’s closer to 17, meaning the premium on stock prices is decreasing.

Yes, anything can change in the future. And yes, poor economic conditions will arise at some point.

But thankfully, they’re not here just yet.

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