As investors come back from the holidays, the next several sessions could potentially set the tone for the weeks and months ahead. Investors may look for stocks to stabilize after heightened volatility in recent weeks and market participants will be keeping their ears open for any potential clues from the Fed about their monetary policy plans going forward.

 

Stocks have seen some upside in recent sessions although it is too early to tell if the recent rally is sustainable. On Friday, the U.S. reported blockbuster job creation as the country added 312,000 jobs in December. The jobs figure blew the doors off estimates which were looking for less than 200,000 jobs created.

 

The employment data gave investors reason to buy stocks and appetite for equities increased further following some comments from Fed chief Jerome Powell. Although the non-farm payrolls report is a key piece of data, much of Friday’s massive rally could likely be attributed to an increasingly dovish Fed. Powell indicated that the central bank is willing to adjust its current policy and markets appear to be breathing a sigh of relief as the New Year gets underway.

 

The strong jobs data bucked the trend of recent disappointment. Key areas of manufacturing have been showing signs of slowing and the housing market continues to show further weakness. Consumer confidence recently sank to a six-month low and the services sector is also an area of concern. In addition to these and other local concerns, the data stream coming out of China remains worrisome.

 

The question now may be whether the strong jobs data is enough to keep the Fed on a more hawkish trajectory in order to prevent accelerating inflation. Markets are currently expecting no rate hikes for 2019 and are even pricing in a small chance for a rate cut. The Fed is in a very tricky position and could potentially reignite recent volatility if it takes a more aggressive stance.

 

Risk assets are also getting a boost currently from renewed optimism for a U.S./China trade deal. U.S. officials kicked off a round of two-day talks in Beijing on Monday and there are hopes that the discussions can build upon the framework set by President Trump and President Xi Jinping.

 

Despite some of the recent positives, many investors remain highly skeptical. Some analysts have suggested that the recent break from stock declines is simply the “calm before the storm” and that the most serious downside is yet to come. 

 

It is also noteworthy that the democrats have now taken control of the U.S. House of Representatives. This has the potential to act as a major market wildcard as the U.S. geopolitical scene is likely to heat up even further.

 

In a sign of underlying market strength; the gold market has given up very little ground even as stocks have rallied. Gold remains within striking distance of key resistance around the $1,300 area and buyers appear happy to step in and buy any dips.

 

The gold market will need to see recent gains extended in the sessions ahead, however, or will become increasingly vulnerable to a more significant sell-off. That being said, the bulls may be simply biding their time until the next major wave of volatility hits risk assets.