Market Commentary 2/22/19

U.S. Treasuries and major equity markets continue to trade benevolently as investors adjust to a more a “risk on” environment. A December wash-out in stocks and subsequent dovish commentary out of the Fed stoked this move upward in stocks and a move downward in interest rates.  For the moment, Mr. Market has moved aside global growth concerns, some weak earnings guidance from analysts, and the fear of Brexit and Italian bond defaults.  Positive talks with China are encouraging and have helped ease the markets.  No less important is the fact that low interest rates spur risk-taking in equities and have arrived just in time for the spring buying season.  Refinance volume has also improved amongst other debt-related activities.

The Fed pausing on their rate hike forecasts does raise some concerns given the supposed strength of our economy and near all-time highs in the stock market.  Historically, the Fed mandate was to watch over employment and inflation, but it is clear that supporting equity and asset valuations is no less important in today’s world. Low rates have probably distorted true price discovery and the Fed will need to be very careful about how to move rates as December’s vicious stock market decline is evidence of what one misstep can bring on.

Next week will be an important week for Fed-related news.  We believe they will be very careful with policy statements and promote their “patience” policy to Congress. 

We are grateful for the low interest rates and continue to advise clients to be cautious with respect to floating rates.  One quickly forgets how fast stocks and bonds can move against you should the market have a change of heart.  A 10-year U.S. Treasury bond trading under 2.700% was not forecasted by many this time last year.