The Fed Will Save Us
Published On: May 30, 2019
Written by: Ben Atwater and Matt Malick
It’s been a lackluster time for the U.S. stock market since January of 2018. Although we’ve seen a series of higher highs following the late January and early February 2018 correction, these highs didn’t last long and rolled over rather quickly beginning in September 2018 (where we experienced a fall of nearly 20% culminating on Christmas Eve). Its déjà vu as we see the market slip this month after setting another high in April.
Meanwhile since November 2018, we’ve experienced a consistent and determined fall in the yield on 10-year Treasuries from 3.24% to 2.26%. This deterioration in yields is a signal from markets that 1) the economy is slipping and that 2) the Federal Reserve is set to lower interest rates in 2019.
Make no mistake, the Federal Reserve is propping-up stock prices (and the economy) and it’s our view that they will continue to do so at virtually any cost.
Coming into 2019, the Fed was slated to raise interest rates four times! All it took was a serious drop in the stock market in late 2018 for the Fed to decide to switch gears from tightening (raising interest rates) to being neutral (holding rates steady). The Fed’s current language implies a neutral position, but futures markets are already pricing in an interest rate cut in 2019.
All the while, second quarter 2019 GDP looks lackluster. The Atlanta Fed GDP Now is tracking growth of 1.3% so far this quarter. First quarter growth was much better than expected at an estimated 3.2% according to the Bureau of Economic Analysis. However, an outsized increase in inventories buoyed growth in the first quarter, which could be damaging to future quarters as the economy works off this excess inventory.
The chart below speaks to two different realities. The relative resiliency of the stock market (blue line) seems to suggest future growth, whereas the plummeting 10-year Treasury yield (orange line) suggests a slowing economy. But, perhaps both signals are correct. In other words, the economy is slowing, but the equity market will again stabilize because the Fed is willing to do anything to support it.
Much of this discussion goes to the fallacy that one can time markets. Just look at the last eighteen months as an example. During this time, we’ve seen euphoria (mid-January 2018) and panic (Christmas Eve 2018). Also, during this period, as we’ve discussed, the Fed went from tightening rates to likely completely reversing itself. Frankly, anything can happen at any time, especially now.
Our title to this article is tongue-in-cheek, as we have no idea whether the Fed has enough fire power to keep risk markets in the green. We think they will try, but we might even be wrong about that.
If the last year and a half and the conflicting signals from markets right now teach us anything, it’s that a disciplined and long-term approach to investing is the only path forward.