By Lisa James & Lori Zager

Why does the current market tone feel different from the February and March stock market selloffs?

The Fed

Earlier in the year, the market was pricing in fewer Federal Reserve rate hikes for 2018. As late as August, many market pundits believed the December rate hike might not happen.

Now, a December rate hike is considered a certainty due to strong GDP and job growth in the second and third quarters.

With this hike, the Federal Reserve is delivering the largest annual tightening in more than a decade, and rising rates are expected to continue.

Fed Chair Jerome Powell is not particularly concerned with short-term stock market weakness. Instead, he is focused on growth, jobs, and inflation, and has indicated plans to raise rates three more times next year.

Tariffs and trade wars

The concept of a trade war weighed on markets earlier in the year, while the actual implementation and consequences have impacted more recent performance.

During third-quarter earnings calls, several companies reported that tariffs negatively affected earnings growth due to:

• Rising input costs
• Supply chain disruptions

The 2017 tax cuts were intended to encourage capital investment and productivity growth. However, trade tensions with NAFTA partners, Europe, and China have reduced corporate confidence and weakened forward guidance.

After strong growth in the first half of the year, companies slowed capital investment in the third quarter.

The earnings and valuation challenge

Markets are now facing two pressures:

1. Earnings (the “E”)

Earnings are being affected by:

• Tariffs
• Rising wages
• Slower global demand outside the U.S.

2. Valuation (the “P/E”)

What investors are willing to pay for those earnings is impacted by:

• Higher interest rates
• Slower earnings growth expectations

Who can address these issues?

President Trump — influence on earnings

Following midterm elections, presidents often seek to stimulate the economy as they look toward re-election cycles.

Historically, since 1946, U.S. stock markets have tended to rise in the 12 months following midterm elections. However, this does not eliminate the possibility of near-term corrections.

If President Trump aims to support growth, a trade deal with China would be the most direct and effective way to improve economic momentum.

Federal Reserve Chair Jerome Powell — influence on rates

The Federal Reserve may pause or adjust its rate hike path if economic growth slows and inflation remains contained.

However, a key wildcard remains:

• Inflation pressures
• Investor demand for increasing U.S. debt issuance

These factors could influence both interest rates and overall market valuations.

Outlook

We expect continued volatility—and potentially a deeper correction—until either:

• The Federal Reserve adjusts its policy stance, or
• Trade tensions are meaningfully resolved

In other words, the “art of the deal” now intersects directly with political and monetary policy realities.

Happy Thanksgiving.