The Fed on Reserve. The Federal Reserve (Fed) doubled down on its patient stance in yesterday’s rate announcement, as policymakers signaled a complete pause in policy while acknowledging a slowing pace of growth and global uncertainty. Still, Fed Chair Jerome Powell conveyed significant faith in U.S. economic fundamentals, noting in his press conference that “it’s a great time to be patient,” as the labor market remains strong, confidence has improved back to encouraging levels, and the outlook remains positive. We dove more into the Fed’s latest comments on policy on the LPL Research blog, which is available now.
Global earnings have converged. Reduced earnings growth expectations in the U.S., coupled with signs of stabilizing earnings overseas, have left profit growth expectations in 2019 for the S&P 500 Index, MSCI EAFE and MSCI Emerging Markets (EM) indexes all in line. While we think it is too early to tactically favor developed international equities over the U.S., the U.S. has for now lost the earnings growth advantage it enjoyed in recent years. The more dovish Fed potentially removes another driver of the U.S. stock market’s relative outperformance via a weakening dollar (see below); though we still believe the economic and policy backdrops favor the U.S., and we continue to focus tactical equity allocations in the U.S. and EM.
Greenback reversal? It’s been a while since the twin U.S. deficits (trade and budget) pressured the U.S. dollar lower. One of the main reasons for U.S. dollar strength in recent years has been the Fed’s tightening of monetary conditions while major foreign central banks remained ultra-easy with their monetary policies. The Fed’s pause levels out that part of the playing field, which could be an incremental positive catalyst for EM equities and suggests keeping a closer eye on developed international.
Rates drop on Fed caution. Yields across the curve slid amid the Fed’s cautious comments and newly released rate projections (in the “dot plot”) that indicated chances of a cut this year. The 10-year Treasury yield dropped 9 basis points (-0.09%) yesterday, its biggest slide on a Fed announcement day since March 2017. Today, the 10-year yield is hovering around 2.50%, a level equal to the upper bound Fed funds rate, while the 2-year yield is trading near 2.40%. If the 10-year yield closes below 2.50%, it’ll be the first time that rate has closed below the upper bound Fed funds rate since March 2008.
LPL Research on CNBC. LPL Senior Market Strategist Ryan Detrick was on CNBC’s Squawk Box this morning discussing the impacts of a potentially weaker US Dollar. You can watch the full interview here.
NEW Street View video. LPL Financial Chief Investment Strategist John Lynch discusses large-cap versus small-cap stocks in late-cycle markets. Watch and share the video now.
- Philadelphia Fed Business Outlook (Mar)
- Initial Jobless Claims (Mar 16)
- Leading Index (MoM Feb)
- Eurozone Consumer Confidence (Mar)
- Japan CPI Report (Feb)
- Nikkei Japan Manufacturing PMI (Preliminary, Mar)
- Markit US Manufacturing PMI (Preliminary Mar)
- Markit US Services PMI (Preliminary Mar)
- Markit US Composite PMI (Preliminary Mar)
- Exisiting Home Sales (MoM Feb)
- Markit/BME Germany Manufacturing PMI (Preliminary Mar)
- Markit Eurozone Manufacturing PMI (Preliminary Mar)
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