Market Pulse: Hello again, Mr. Powell
Just a few days after Fed Chief Jerome Powell offered some re-assuring words about interest rates he went on to say that there would not be another rate boost this year, not even one.
The reason: He expects the GDP growth rate to slow due mostly to weakness overseas and to some extent to the trade dust-ups.
Investors had already reached the same conclusions as Mr. Powell. A slower rate of growth, especially overseas but also in the U.S., has been baked in the cake for several months and mentioned here more than once. That is why central banks everywhere are either cutting rates or keeping them at rock-bottom levels and being more accommodative in other ways.
Interest rates in some countries are below zero (Germany, for one). One or more rate cuts this year, until last week considered out of the question, are now predicted by a majority of economists.
We need to view the Fed’s forecasts with more than a few grains of salt. What were they looking at late last year to make them so certain that rates had to rise into 2020? A few months ago the Fed saw strength far ahead, now it sees weakness. Should we care? Maybe. Then again …
The Fed’s forecasting record is hardly enviable. They underestimated growth after the tax cuts, and from 2010 through 2016 they overestimated the impact of stimulus spending (cash for clunkers, etc.) and their own QE programs.
Years before that, Alan Greenspan warned of “irrational exuberance” in the stock market and correctly so, but he was two years early. Investors became a lot more irrational and a lot more exuberant … until they weren’t in 2000. Ben Bernanke assured us that the high-risk mortgage problems in 2008 were well contained and no cause for concern. Not exactly.
Still, Powell’s comments last week were market moving. Bond prices rallied and rates fell.
Many times I’ve made the point that no matter how “certain” the Fed and Wall Street strategists are that rates are going one direction we should have at least some exposure to investments that will do well if they don’t.
On Dec. 14 I wrote, “the smart investment approach is to have some exposure to assets that would do well if rates rise and some to positions that would do well if they stay flat or fall.” We are seeing again why such a balanced approach makes sense.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.