Are Animal Spirits Making a Comeback?

New year, new attitude. Despite all the forecasts of doom and gloom that rippled through global markets in December, investors across almost all asset classes and regions are in a much better mood in the early days of 2019. The MSCI All-Country World Index is up 8.18 percent since Christmas as volatility measures plummet. Oil entered a bull market on Wednesday. Junk bonds are soaring. Emerging-market currencies are the strongest since July. Heck, even pariahs such as Saudi Arabia and Turkey are able to borrow in the global debt markets with no trouble.

That’s not to say that last month’s sell-off was unjustified. Global growth is slowing, just not to the degree suggested by the rout in asset prices. The World Bank on Tuesday came out with its latest forecasts for global economic growth this year, and the surprise was that its estimate was reduced by just 0.1 percentage point, to 2.9 percent from 3 percent. Investors are also heartened by signs of progress in resolving the trade war between the U.S. and China. Global stocks rose more than 1 percent Wednesday as the U.S. wrapped up three days of midlevel talks with China in Beijing, noting a commitment by President Xi Jinping’s government to buy more U.S. agricultural goods, energy and manufactured products. On top of that, Federal Reserve policy makers seem a little less tone deaf to the messages sent by markets last month. Four Fed regional chiefs on Wednesday declared that the central bank can take its time to assess market turbulence and risks to the U.S. economy before adjusting monetary policy again, solidifying support for a pause from further interest-rate increases, according to Bloomberg News.