Not even 2 months into the new year and how many fresh highs? The recent low volatility environment can give the impression that risk factors are being treated with an out of sight, out of mind mentality. Interestingly, many of the risks that topped my list just six weeks ago haven’t gone anywhere but seem to register less now—the trade war, tensions with Iran, a possible recession. Coronavirus has caused some jitters year-to-date but overall the market has been shrugging off risks. I believe there are several reasons for that: the Fed, jobs and, yes, Millennials.

Thank you Fed, may I have another

Markets love central bank liquidity as much as they love certainty. In fact, liquidity may be the new certainty. Chairman Jerome Powell essentially told lawmakers that the Fed has the market’s back in his semiannual congressional testimony.

Powell said that the central bank was “closely monitoring” the coronavirus and its spread could affect the global economy.1 He reiterated that the U.S. economy continues to shrug off global risks and 2019’s rate cuts should provide a buffer.

The Fed is likely to remain on hold in 2020, but as our Michelle Cluver pointed out in her report on monetary policy, Fed-speak should remain reassuring. Also, monetary policy’s a laggard, so the benefits of 2019’s monetary easing should continue in 2020.

The Fed continues to purchase $60 billion of Treasury bills per month to pump up repo market liquidity. The purchases, which began in October 2019, are likely to continue into Q2 2020.2 The Fed isn’t calling it quantitative easing (QE), but that’s just semantics. Whatever it’s called, the market likes it.

Jobs and the consumer go hand in hand

Sometimes investors lose sight of the employment landscape and its significance. Investors also lose sight of how the labor market affects the consumer. And that’s a mistake.

The power of the U.S. consumer is second to none, contributing around 70% to domestic GDP each year. Consumers spend when they have jobs, and their spending can mitigate more than a few risks underlying the economy. The U.S. is near full employment according to some metrics, illustrated by unemployment holding near multi-decade lows. Labor participation is increasing, showing the highest numbers since June 2013. January’s non-farm payrolls added 225,000 jobs over the month, demonstrating that the economy continues to add jobs at a healthy rate.

Importantly, U.S. consumer confidence grew in January, and to its highest level since March 2018.

Millennials continue to spend

And we owe them a big “Thank you!” A good portion of the population born between 1981 and 1996 increasingly wields its influence on the economy. As Millennials begin to reach their prime spending years Baby Boomers should give them their just due.

Millennials spend a disproportionate amount of their wallet share on vehicles, apparel, housing, and food away from home.3 These changing generational spending habits continue to fuel the market and Boomer retirement accounts. (The “OK Boomer” saying takes on a different connotation in that context).

While concerns about debt levels and recession blowback abound, Millennial buying power could be juiced by the massive transfer of generational wealth that’s underway. As that population ages and spends, their behavior could provide the economy a nice cushion.

What keeps me up at night

The bond market is reflecting concerns. I’m watching the yield on the 10-year Treasury, which dropped recently as coronavirus concerns grew, and continues to decline as of this publication. China has its work cut out for it. The country is largely under quarantine and the efficacy of its containment is firmly to be determined. If it’s not on point, the global economy’s already tenuous footing could lose some more traction.

On the plus side, I suppose, the virus moved trade tensions with China to the back burner. But trade is one of those risks that can flare up at any time, whether with China or Europe.

Also, it’s now just about eight months until Election Day 2020. The Democratic candidate field is slimming, but the Iowa caucuses and New Hampshire primary yielded few answers. Thus far, investors continue to ignore the possibility of a sharp left turn for the party and what that could mean in the general election, not to mention business investment. But that could change.

Conclusion

The market’s recent highs raised a few questions, the most important of which is why? It was just last fall that recession alarm bells rang loud when the most predictive segment of the yield curve inverted. That seems like a distant memory, even in this later cycle market. Sometimes it’s easy to forget when a stock like Tesla acts like the headiest days of bitcoin. (Remember bitcoin?) If market performance is all about the Fed’s liquidity, then maybe we have less to rejoice. But the labor market continues to give us good news, wage growth shows signs of life and the consumer’s spending. Fundamentals like that are worth celebrating—for now anyway. As always, don’t get complacent.

FOOTNOTES

1. CNBC, Powell stresses that Fed is ‘closely monitoring’ coronavirus for hit to China and the world, 11 Feb. 2020.
2. Bloomberg, The Debate Over Whether to Call it QU is Over and the Fed Lost, 17 Jan. 2020
3. Morgan Stanley, How a ‘Youth Boom’ Could Shake Up Spending Trends, 16 Aug. 2019

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