Whatever happened to the recession calls? Seems like just a few weeks ago that the correction in the stock market, as well as the partial government shutdown, had convinced many analysts and investors the US was about to enter a recession.
We've written about it over and over, and while many advisors seem to understand, the media, politicians, and many analysts don't...or won't. So, we thought we'd try again to explain why so many people don't understand the nearly ten-year long bull market in U.S. equity values.
The Doves won the day at the Federal Reserve, which noted continued solid economic performance but removed longstanding language that further gradual increases will be warranted, and instead highlighted global developments – both economic and financial - and a moderation in inflation as reasons the Fed will be "patient" in determining the pace of future rate hikes.
When it comes to monetary policy, one thing looks certain for 2019 - journalists, pundits, investors, and analysts will pay it way more attention than it deserves. The spotlight is currently on Wednesday, when the Federal Reserve will issue their first statement of the new year. The consensus expects no changes in rates, and we agree.
Normally, the end of January sees the government's first estimate of real GDP growth for the fourth quarter. But with no end in sight for the shutdown, which has already seen numerous other data releases postponed – including figures on retail sales, international trade, inventories, construction, and durable goods - it's very unlikely the GDP report will arrive on time.
For the more than three decades we have been involved in analysis of the economy, one nagging constant has been pessimistic prognostications over the U.S. debt. Now once again, debt is the news de jour. Consumer, business, and government debt are all at record highs, and, therefore, the theory goes, the economy is tempting fate.
Talk about destroying a narrative. On Friday, the Labor Department reported 312,000 new jobs in December, with an additional 58,000 from upward revisions to prior months. Recession talk got crushed.
Early in 2018 we said the US economy has gone from being a Plow Horse to Kevlar. Nothing that has been thrown at the economy since – neither trade conflicts nor tweets, not higher short-term interest rates nor the correction in stocks – is likely to pierce that armor.
Today's much anticipated Fed meeting brought answers and new questions. As expected, the Fed raised rates 25 basis points to a range of 2-1/4 to 2 1/2 percent, marking a fourth rate hike in 2018.
Last week in the New York Times, Yale economist Robert Shiller wrote we are "experiencing one of the greatest housing booms in United States history." Given what happened in the aftermath of the last boom – a financial panic and the Great Recession – this will add to investors' fears about another recession lurking around the corner.
Last Friday, the 10-year Treasury Note closed at a yield of 2.85%. That's up from 2.41% at the end of 2017, but down from the peak of 3.24% on November 8th, and well below where fundamentals suggest yields should be.
New Narrative Alert: Fed Chief Jerome Powell is to blame for the volatility in stocks. Back on October 3rd, with stock markets near their record highs, Powell said "we're a long way from neutral." That was not long after the Fed had moved the federal funds rate to a range of 2.00% to 2.25%...
It's that time of the year again. Holiday sales data show surging online sales while foot traffic at brick and mortar stores remains tepid. If you have a sense of déjà vu, it's because you heard the same stories last year.
Fed Chair Jerome Powell and others have started a new narrative about economic "headwinds." They think past rate hikes, slower foreign growth, and "fading fiscal stimulus" should slow the Fed's rate hikes. But is fiscal stimulus really fading?
Politics and economics are interwoven. Government grants licenses, enforces contracts and the rule of law, provides fire and police protection, a national defense, and can call on resources to recover from crisis. Without these institutions, activity would slow. No one is building billion-dollar hotels in Syria, Libya, or Iraq; stability and certainty support investment.
No fireworks in today's FOMC statement, as Chairman Powell and company held rates steady while reinforcing their outlook. Unemployment remains low, household spending remains strong, and inflation is running in-line with their 2% inflation target. In other words, today's near unanimously expected pause looks almost certain to be followed by a rate hike at the December meeting.
Growth is determined by a perpetual tug-of-war between entrepreneurship and government redistribution. When President Obama was in office, we believed incredible technological innovation would allow for economic growth in spite of Obamacare, greater redistribution, higher taxes and increased regulatory burdens. We thought it would be a Plow Horse Economy, and that things would get better if we did not grow government so much.
A solid 3.5% real GDP growth rate reported for Q3 wasn't enough to appease the doomsayers. They say inventories boosted growth and that can't last. Plus, they say, business investment was soft.
Economic growth continued at a robust rate in the third quarter, supporting the case for both a continued bull market in stocks and further rate hikes from the Fed.
Not long ago, many investors were kicking themselves for not investing more when the stock market was cheaper. But when stocks fall, like they did last week, many investors have a hard time buying for fear stocks may go lower still.
Federal Reserve Board Chairman, Jerome Powell, who has been remarkably quiet as he adjusts to his new role at the Fed, finally roiled markets last week. He made comments on Wednesday, during the Atlantic Festival at a session moderated by Judy Woodruff of the PBS News Hour.
As far as Harvard economist Martin Feldstein is concerned, we're all doomed. Feldstein says that the low interest rates of the last several years have created a stock market bubble rivaling the housing bubble that precipitated the last crisis. Why? Let's start by looking back.
As expected, the Federal Reserve raised rates by 25 basis points today. And at this point, the outlook for the remainder 2018 looks largely determined, with both 75% of Fed officials and the markets pricing in one more rate hike in December to make it four for the year.
The Federal Reserve meets on Wednesday and there's one thing we know for sure: it's going to raise rates by another 25 basis points, lifting the federal funds rate to a range from 2.00 to 2.25%.
The U.S. federal government reported last week that it ran a deficit of $214 billion in August, the fifth largest deficit for any single month in US history.
Friday's jobs report finally included what appears to be evidence of the long-awaited acceleration in wage growth.
In spite of woeful prognostications to the contrary, the US economy seems to be wearing Kevlar. Rate hikes, tariffs, Turkey, you name the fear, the economy remains unscathed. Case in point, through all the supposed turmoil, the U.S. grew at a 4.2% annual rate in the second quarter and looks set for a similar pace in Q3.
"Wealth creation" versus "the redistribution of wealth" is an age-old political/economic battle. And once again, Senator Elizabeth Warren - among others - has capitalism in the crosshairs.
Something strange happened after last Friday's jobs report - the yield on the 10-year Treasury Note fell, finishing Friday at 2.95%, down four basis points from Thursday's close. To us, this makes no sense. If anything, it serves to reinforce our view that the bond market is making a big mistake.
The Federal Reserve made no changes to monetary policy today and it barely changed the language of its statement. That makes sense to us because we haven't changed our outlook for monetary policy or the economy, either.
Paul Krugman, Larry Summers and Bob Gordon have some 'splainin to do. Where's that "secular stagnation?" Since 2009, they, along with many others, have said the US economy is stuck at 2% real growth. Their theory got traction after 2009, as the U.S. saw what we called a Plow Horse Economy.
Economic growth surged in the second quarter this year. The only question is, by how much?
The yield spread between the 2-year and 10-year Treasury Note has narrowed to 25 basis points, its smallest spread since 2007. This has many investors worried the narrowing spread will lead to an inversion of the yield curve (when short-term rates exceed long-term rates) – which throughout history has often occurred prior to a recession.
The US labor market is going from strength to strength. Like with corporate earnings, June jobs data beat consensus estimates - up 213,000 - pushing the average monthly gain for the past year to 198,000 per month.
At least three reasons suggest the Democrats should be optimistic about taking control of the House this November.
What do the internet and China have in common? For better or for worse, policymakers are no longer treating them with kid gloves. This past week, the Supreme Court reversed a decision made before the dawn of the internet that prevented states from taxing sales to their residents unless the business had a "physical presence" in the state. Now, each state gets to decide whether those sales get taxed.
We've always been skeptical that bond yields carry deep meaning about the future. Low Treasury bond yields in recent years were said to be a signal of slower growth, or possibly a recession, ahead. And the bond world said stocks were over-valued.
To little surprise, the Federal Reserve hiked interest rates by 25 basis points following today's meeting. Of much greater note are the hawkish changes made to the text of the Fed's statement (and with no dissents), as well as changes in the forecast materials.
According to former Fed Chair Ben Bernanke, the U.S. economy will get a Wile E Coyote surprise in 2020. You know, just when everyone thinks he caught the Roadrunner, Wile notices he has run straight off a cliff, plummets seemingly forever before hitting the bottom in a cloud of dust, and then, just for spite, an anvil lands on his head.
In over thirty years of watching the economy we've seen recessions, recoveries (both slow and fast), panics, lulls, and boomlets. But we've rarely seen a job market this strong.
For decades, investors have feared the national debt growing to unsustainable levels and destroying the US economy. Back in 1981, the public debt of the federal government was $1 trillion; today it's more than $21 trillion. At some point, their theory goes, additional debt is going to be the fiscal straw that breaks the camel's back.
Asking if the Federal Reserve will lift the federal funds rate on June 13 is like asking if Las Vegas Golden Knights goalie Marc-Andre Fleury, who has stopped 94.7% of the shots against him in the 2018 Stanley Cup playoffs, will stop the next one. It's a virtual lock.
The US labor market has rarely been stronger. Recent figures from the Labor Department show US businesses had a total of 6.550 million job openings in March versus 6.585 million people who were unemployed. That's a gap of only 35,000 workers.
The bull market in U.S. stocks, which started on March 9, 2009, gets little respect. Those who have been bullish, and right, are mocked as "perma-bulls," while "perma-bears," who have been repeatedly wrong, are quoted endlessly.
The Federal Reserve held interest rates unchanged following today's meeting, but also left a few clues that they see economic activity and inflation heating up more than previously projected. A rate hike in June looks all but set in stone, and today's statement is consistent with two more rate hikes in the second half of the year, for a total of four hikes in 2018.
From mid-2009 through early 2017, the US economy grew at a real average annual rate of 2.2%. Not a recession, but not robust growth either, which is why we called it a Plow Horse Economy.
When the report on international trade came out earlier this month, protectionists were up in arms. Through February, the US' merchandise (goods only, not services) trade deficit with the rest of the world was the largest for any two-month period on record. "Economic nationalists" from both sides of the political aisle, think this situation is unsustainable.
An entire generation of investors has been misled about interest rates: where they come from, what they mean, how they're determined.
One of the most important questions we have about our country's future is whether prosperity itself will make the American people lose sight of where that prosperity comes from; whether we'll forget to cultivate the attitudes about freedom, property rights, and hard work that have made not only us great but also all the other places that have followed the same path.
Stock market volatility scares people. But, volatility itself isn't necessarily bad. Only if there are fundamental economic problems, something that could cause a recession, would we think volatility itself is a warning sign.