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The Fed Backpedals

Fourth quarter last year, Federal Reserve Chairman Jerome Powell confirmed that the Fed expected to raise short term interest rates three times in 2019. The result was a 13.5% decline in the S&P 500 Stock Index.

First quarter, data showing a slowing U.S. Economy caused the Fed to reverse course, announcing that they may not raise interest rates at all this year. Primarily as a result of that announcement, stocks had a good quarter, with the S&P 500 Stock Index rising 13.6%.

Will the data showing a slowing U.S. Economy, stall the stock market’s advance? In addition, the interest rate available on short term U.S. Treasury securities exceeded the yield on 10 year Treasury securities. This “yield curve inversion” has often but not always been a harbinger of recession and stock market decline. However, this time around, there are some mitigating factors.

  1. The Fed has decided to keep interest rates steady and these low rates may spark resurgence in economic activity.

  2. The low rates available on fixed income securities makes stocks look more attractive.

  3. The low and even negative interest rate environment in Europe is driving investment flows to U.S. Treasury securities. This may be a significant factor in the yield curve inversion having nothing to do with our domestic economy.

  4. We see little evidence of economic or stock market excess, other than the exuberance for new issues, as exemplified by the recent offering of Lyft shares.

  5. Business inventories do not seem over extended and most investors and business executives remain cautious.

We cannot predict how long this period of low interest rates and low inflation will last, but while they do and stocks do not appear to be overvalued, we remain sanguine.


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