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Stocks Turn Lower After Fed Announcement, Weak Data For the week of March 25, 2019

Key Market Data

03/15/2019 03/22/2019 One Week Change YTD One Year
S&P 500 Index 2,822.48 2,800.71 -0.77% +12.26% +8.07%
MSCI EAFE Index 1,890.31 1,882.97 -0.39% +10.23% -3.33%
Barclays Capital U.S. Aggregate Bond Index 2,081.88 2,099.93 +0.87% +2.61% +4.68%
10-year Treasury Note Rate 2.589% 2.441% -14.8 basis points -24.4 basis points -38.4 basis points

If there was any doubt about the sway the Federal Reserve has over investors and the stock market, last week should have put them to rest. Stocks treaded water early in the week as investors waited for the Fed’s two-day meeting to conclude. Then, on Wednesday, the Fed said it wouldn’t raise its benchmark rate again this year because of evidence of a global economic slowdown. Indexes wavered until Friday, when news about weak manufacturing in Europe and the United States sent them sharply down, with the Dow losing 460.19 points. At the same time, the 10-year Treasury dipped to its lowest level in a year and there was one sign of a yield curve inversion, seen by some as an indication of an impending recession. Nonetheless, stocks are still well up in 2019, with the Dow having gained 9.2 percent this year, the S&P 500 11.7 percent, and the Nasdaq a lofty 15.2 percent.

As for the Fed, people — including President Trump — who’ve been concerned about the impact of higher interest rates on economic growth, can breathe easy. Despite the Fed having forecast two hikes this year as recently as December, Chairman Jerome Powell said the Fed was unlikely to raise its rate in 2019, and some analysts now think it’s possible there will be a rate cut this year. On the flip side, the Fed’s outlook for U.S. economic growth has softened, mainly because the economies of China and Europe have slowed “substantially.” As a result, the Fed lowered its forecast for growth in 2019 to 2.1 percent from 2.3 percent in December (the White House is estimating 3.2 percent), and to 1.9 percent for 2020 from 2 percent. At his post-meeting press conference, Powell said the economy was in “a good place,” but that “growth is slowing somewhat more than expected,” notably in consumer spending and business investment. He added that even job growth “appears to have stepped down” from last year but concluded that “economic fundamentals are very strong.” Still, Powell noted, “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.” The Fed also said it would stop shrinking its $4 trillion portfolio of bonds and securities in September.

Trump’s verdict, and a nominee

Late in the week, President Trump blamed the Fed’s rate hikes for the economic slowdown maintaining that, had the Fed stopped earlier, GDP would have eclipsed 4 percent last year. He added, “The world is slowing, but we’re not slowing.”

He also nominated Stephen Moore to be a Fed Governor. Moore, a fellow at the Heritage Foundation, a conservative think tank, and an adviser to Trump’s 2016 campaign, has been critical of Powell’s policymaking.

The trade talks

There was also news about the trade talks with China, with Trump saying that even after a deal he might leave $50 billion in tariffs on Chinese goods in place to ensure that China “lives by the deal.” A U.S. delegation is going to Beijing this week and China’s negotiators will come to Washington next week, with both sides hoping to have a deal finalized by the end of April.

The Brexit saga

Though the original deadline for the Brexit was this Friday, there’s still no end in sight. After Parliament rejected her plan for the second time, Prime Minister Theresa May petitioned the European Union for an extension, and she got one — with conditions. May had hoped to get an extension until Jun. 30, but the EU only gave her until May 22 on the condition that her plan passes Parliament. That’s unlikely as the Democratic Unionist Party, her coalition ally, said it wouldn’t support her. If Parliament doesn’t approve her plan, the EU will only extend the date until Apr. 12. Germany’s Chancellor Angela Merkel said, “We need to do everything until the very last hour for the UK to have an orderly exit from the EU.” However, if May’s plan does not get approved this week, there’s the possibility of a “no deal” Brexit. On Saturday, as many as one-million protesters, including Scotland’s Prime Minister Nicola Sturgeon, marched in London demanding a second referendum on Britain’s membership in the EU.

The deficit

The government posted a record $234 billion deficit in February bringing the deficit for the fiscal year-to-date to $544 billion compared to $391 billion for the same period a year earlier. For the first five months of fiscal 2019, spending was up 9 percent and revenues down about 1 percent

Manufacturing slides

Friday’s stock market slump was triggered in part by IHS Markit reporting that its manufacturing index for Germany hit a six-year low of 44.7 in March while the Eurozone fell to 47.6, its slowest pace since 2013. In addition, the U.S. index dipped to 52.5, its lowest reading since August of 2017. Not only did stocks in Europe and the United States fall on the news, but the yield on Germany’s ten-year treasury briefly fell into negative territory for the first time since 2016.

Oil cuts to continue, home sales soar

The price of oil finished up last week partly because the Organization of Petroleum Exporting Countries announced that the production cuts of 1.2 million barrels a day that began in January would continue at least through June. The price of Brent crude is up 25 percent this year.

In other news, existing home sales surged 11.8 percent in February from January to an annual rate of 5.51 million, the National Association of Realtors reported, spurred by lower mortgage rates that are likely to go even lower after the Fed’s decision. It was the second biggest month-over-month jump ever. However, existing home sales were down 1.8 percent from a year earlier. Despite lower mortgage rates, the National Association of Home Builders/Wells Fargo index was unchanged in March from February at 62 (any reading above 50 indicates optimism). And first-time jobless claims fell 9,000 to 221,000 for the week ending Mar. 16; the four-week moving average was up 1,000 to 225,000.

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