As if on cue, the markets that began rallying after Christmas have continued to do so right on through the end of the first quarter. Propelled by the Fed’s pivot toward a more patient view on monetary policy, investors are reading the Fed as stepping away from the rate increases that were previously earmarked for 2019. With the low interest rate environment back in vogue, investors are once again willing to take a position in risk assets via the equity markets. Some would point out that the economic data does not warrant a strong stock market, but investors are looking through the poor economic data and are assuming that the economy, after a brief lull in recent months, will pick up through the remainder of 2019. Like the Fed, we will have to be patient and see!
Geopolitically, a resolution on the U.S. / Mexico border dispute and trade agreements with major economies around the world could bolster stocks into the summer. Nothing is certain regarding politics, so volatility is likely as news about a trade deal (both positive and negative) get leaked ahead of a final deal.
Fears of a recession are rising as the yield curve briefly inverted and other decelerating indicators on housing and business spending have accompanied the economic slowdown. The timing of any recession is at best an art, and at worst a best guess. That said, the weak data overseas certainly threatens a spillover type of effect on the U.S. given the global nature of our economy. Job and wage gains continue to support a healthy consumer and suggest a rebound in output remains likely in the second half of the year. Also, on the brighter side, benign inflationary pressures mean “real” growth in profit margins from major U.S. companies remain largely intact even as total sales have slowed a bit thus far in 2019.