The year started off poorly, to say the least. Equity markets plunged from the get-go.  The Nikkei, DAX and S&P 500 gapped lower on the first trading day of the year. Emerging markets and commodities were smashed.  

Many economists blamed the Federal Reserve for hiking rates in mid-December. Pundits warned that the seven-year bull market and weak economic recovery in the US was ending.  A recession loomed, and worse because monetary policy had lost its effectiveness and fiscal policy was political neutered.  

However, the first quarter is best understood as one of two halves.  The markets turned around the February 11-February 12 though we note that the MSCI Emerging Market equity index bottomed on January 21. The index is up six of the past nine weeks.  The rally was extended to nearly 21% and the pre-weekend high brought it to the highest level since last November. 

Consider that the S&P 500 has advanced seven of the past nine weeks, including the past five. It closed the gap created at the start of the year and is now fractionally higher on the year.  The MSCI World Index (tracks equities of the high income countries) has also rallied for the past five weeks and seven of the last nine. Since February 11 it is up a little more than 13% and posted its highest close of the year before the weekend. 

The price of oil also closed higher for the fifth week and the seventh in the past nine weeks. The May light sweet crude oil futures contract bottomed on January 20. The price has risen by 43% through the pre-weekend high, to reach a four-month high.  

The euro’s advancing streak extended for its third week.  It has gained in six of the past nine weeks. The dollar has been performing in sawtooth pattern against the yen, alternating up and down for the past five weeks. The dollar has risen against the yen in four of the past nine weeks.  On a trade-weighted basis, the dollar has fallen for three consecutive weeks and is off five of the past seven weeks.  

Many investors and pundits express exasperation with officials and the temporal inconsistencies.  Yet the signal from investors has been neither clear nor consistent.  Prices have swung more than changes in economic fundamentals.  One need not claim the onset of new paradigm simply because the currency markets have not responded to changes in monetary policy in a linear mechanical way.