Great Expectations (for Not So Great Growth)


The Federal Reserve had its regular two-day meeting this week. The market was largely expecting the FOMC to keep policy unchanged but all eyes were on the economic outlook for this year. The Fed left policy rates unchanged and indicated no rate increases in 2019, which is lower than the two rate increases that were previously forecast. The Fed also expects to wind down the balance sheet reduction by September, which is sooner than the year-end timeline previously expected by the market. 

Moral of the story: While this accommodative policy was the good news the market wanted to hear, it also comes in tandem with the Fed lowering its economic growth forecast for 2019. If economic indicators continue to slow to the point where the Fed feels the need to cut policy rates, that’s not going to be a great environment for corporate earnings or stocks. 

Global Worries

In addition to the Fed’s worries about a slowing economy in 2019, we also heard cautious tones from multinational companies this week. Citing worries about Brexit, trade tensions, and slowing global growth, executives from UBS and FedEx and BMW and (this feels like an AT&T commercial…) Samsung warned markets and investors of a tough operating environment for 2019. The CEO of UBS actually referred to the current economic backdrop as one of the worst first-quarter environments in recent history. Oh good. Stocks obviously tumbled on these worries throughout the week. 

Moral of the story: A slowing global economy seems somewhat of a certainty at this point. The interesting thing for me here is the market reaction to these worries over the last six months. Starting in September last year, these worries caused the market to move into defensive stocks but that rotation hasn’t necessarily carried through in the beginning of this year as some of the biggest winners have been high-growth tech stocks (opposite of defensive). Seems like a good time to scoop up some more defensiveness heading into earnings season, which is sure to put a lid on high growth expectations for this year. 

Closer to Home 

The Philly Fed’s Business Outlook survey, which is followed as an indicator of trends in the manufacturing sector, was published this month and the headline number came in at the high end of market expectations. The catch here is the underlying data, which indicated two different stories. Data for shipments and hiring were very strong, but new orders have been flat for the last two months and the six-month outlook fell sharply to 21.8, which is the weakest print in over three years. 

Moral of the story: The Philly Fed survey is correlated with the ISM manufacturing index that will be released in the first week of April. The stock market prefers a healthy manufacturing sector (the bond market looks at this slightly differently) because it generally signals stronger corporate earnings. The February ISM manufacturing index was 54.2 (historically this level indicates an expansionary economy), but this month’s Philly Fed survey doesn’t really provide a clear indicator of what the ISM manufacturing index will tell us in a week. Fingers crossed.