The rebound of 2019 continued in March, as fears of a slowdown were overcome by continuing solid economic data. After a few nail-biting moments, ‘Brexit’ received a long term delay, and may have even been effectively canceled. President Trump continues to hint at a ‘big deal’ with China. Employment numbers and economic growth seem solid, while inflation continues to behave. All of this, and the Fed appears to have made a dovish pivot – or at least, seems to have stopped raising rates for a while.
The U.S. stock market rallied in March, although bonds rallied almost as much. Both stock and bond market seem to approve of Powell’s new dovishness. Foreign stocks have not done quite as well – economic data in Europe are much weaker than in the U.S. German GDP shrank in the 3rd quarter of 2018, then was slightly positive in the 4th quarter, just barely avoiding an official recession. By the numbers:
Oil prices continued to rise in March, gaining an additional 4.63%, and for the year are up a whopping 32%. Strife in Venezuela continues to remove supply. Also, OPEC continues its production cuts in conjunction with Russia (not an official member of OPEC, but currently working with them). The U.S. dollar rose in March, and is up about 1% for the year. So far, the burgeoning federal deficit has not scared investors away from the U.S., as we continue to look like a better growth story than Europe or Japan, and emerging markets are vulnerable to any trade shocks from China. Gold declined slightly in March, and is nearly flat for the year to date.
The ISM Manufacturing PMI in March was 55.3%, up 1.1 percentage points from the February reading of 54.2. The non-manufacturing, or services, index came in at 56.1%, which is 3.6 percentage points lower than the February reading of 59.7. Both numbers continue to show expansion, although the pace in the non-manufacturing survey declined relative to last month. The Commerce Department released final GDP data for 2018. They revised 4th quarter growth down to 2.2%, after an initial estimate of 2.6%. For the year, U.S. GDP grew an underwhelming 2.9%, despite a historic tax cut. Still, this is a better number than 2.2% growth in 2017.
The National Association of Realtors reports that existing-home sales in March fell by 4.9%% from the rate in February, and are 5.4% lower than they were a year ago. The median home price rose 3.8% to $259,400 from a year ago. Median home prices have been rising for the past 85 months. The average 30-year mortgage rate in March was 4.27%. Distressed sales (foreclosures and short-sales) were 3% of total sales in March, down from 4% last month, and down from 4% a year ago.
The chart below, courtesy of the Federal Reserve, shows how the U.S. unemployment rate has ebbed and flowed since 1948. As you can see, unemployment is near historical lows, which is good news for anyone who has a job, or wants a job. At the same time, since investors are more worried about tomorrow than yesterday, the low unemployment rate is actually cause for pause. The shaded areas are periods of time when the U.S. economy entered a recession – oddly enough, most occur when things are going well, and when unemployment has fallen.
The reasons that the U.S. enters a recession are complex, and not completely understood. From an unemployment perspective, however, when unemployment drops, typically companies have to pay more to attract workers. As this happens, corporate profits hit headwinds, which causes the stock market to worry. In addition, as workers experience higher salaries, they can afford to buy more, which causes inflation to move up. When the Fed has to raise rates to counter inflation, this also causes the stock market to worry. So low unemployment and rising wages can cause a chain reaction that leads to lower stock prices.
So far, this has not happened. In fact, the Fed has indicated that it does not see enough inflation to warrant higher interest rates, giving the stock market some room to breathe. In addition, although wage growth has been relatively strong, consumer spending remains restrained.
The future remains impossible to predict. However, it does seem reasonable to be more cautious as an investor, as history shows that periods of low unemployment are often followed by periods of rising unemployment and slowing economic growth.
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www.standardandpoors.com – S&P 500 information
www.msci.com – MSCI EAFE information
www.barcap.com – Barclays Aggregate Bond information
www.bloomberg.com – U.S. Dollar & commodities performance
www.realtor.org – Housing market data
www.bea.gov – GDP numbers
www.bls.gov – CPI and unemployment numbers
www.commerce.gov – Consumer spending data
www.napm.org – PMI numbers
www.bigcharts.com – NYMEX crude prices, gold and other commodities
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