The financial markets have been recalibrating their expectations for monetary policy since the FOMC’s December meeting and their expectations for economic changes under the incoming Trump 2.0 administration since Election Day. In this context, Friday’s strong employment report only served to cement investors’ sense that the Fed should pause its easing. Both bond and stock markets reacted like the sky was falling. We’re not surprised by this January correction, and we view it as healthy: The markets are gaining a more realistic sense of the current situation, recognizing that interest rates will stay higher (i.e., normal) for longer, while the economy remains resilient. A strong Q4 earnings season should help to restore shaken investors’ confidence.
