February 2019 Recap: Don’t Fear the Fed!

The markets registered another solid month, with all of the major indicators moving further into double-digit returns for 2019.  The strong performance, surprising to many economists and analysts, comes in spite of the lukewarm earnings gains for many companies.

Weaker earnings gains were anticipated by the market, but some had gone too far, predicting actual losses rather than smaller increases when compared with 2018.

The U. S. economy continues to chug along, though at a slower pace than the Trump Administration might have hoped for.  The benefits of last year’s major tax legislation appear to be waning, with little or no increase in capital expenditures by business.  Most of the funds freed up by lower tax rates appear to have been spent on stock buybacks. Another reason for slower economic growth over the past couple of years has been the moribund U. S. housing market.  So far, this year has proven no different.  Existing-home sales fell 1.2% in January, their third straight monthly decline.  Year-over-year, the decline was 8.5%.

Another perspective on the history of the real estate sector comes from so-called “housing starts.”  New construction fell dramatically during the Great Recession of 2007-2008, falling from almost 2.4 million units per year before the financial crisis to a little more than 1.2 million units last year.

Interest rates, specifically mortgage rates, have always been a key factor in the strength of the housing market.  That belief too now appears to be in question.  Ten years of ultra-low mortgage rates haven’t sparked a recovery in new home construction.  Another reason often given for the continuing weakness is the lack of demand from young people – the millennial generation, which is already burdened by more than $1 trillion in student loan debt.

Another data item of interest last week was the outflow of funds associated with foreign investors.  For the first time in six months, foreigners withdrew more than they invested, leaving net withdrawals of -$48.3 billion.  As usual, most of their activity was concentrated in Treasury and Agency securities, not common stocks.

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