September 26, 2018

The major stock market averages opened higher this morning (Dow +49 pts; SPX +.24%). Consumer discretionary, healthcare and telecom sectors are leading the way (+.7%). Strangely enough, financials are sagging in front of the Federal Reserve’s interest rate announcement later this afternoon. In addition, energy and materials sectors are in the red. The dollar is trading slightly higher and commodities are mostly lower. WTI crude oil is back under $72/barrel. Gold is down .5% today and 8% so far this year. Despite a likely interest rate hike later today, the bond market is holding its own. The 5-year and 10-year Treasury yields are hovering at 2.98% and 3.09%, respectively.

New home sales picked up in August, returning to an annualized rate of 629,000 transactions. Home sales have weakened this year due to rising home prices, rising mortgage rates, low inventory of homes, and thus falling affordability. Don’t get me wrong—new home sales this year have been higher than in any other year of this economic cycle. And housing demand is still outpacing supply. It’s just that the volume of transactions may have peaked due to the factors listed above. Economists expect transaction volume to decline further—and thus add less to economic growth—in the near-term. And we should see the rate of home price growth decelerate a bit.

The Federal Reserve’s Open Market Committee (FOMC) will wrap up its monthly policy meeting today. Bond traders expect the FOMC to raise its policy short-term interest rate (“Fed-funds”) to 2.25% from 2.0%. The expected move has already been priced into the bond market. So what’s really important is the Fed’s outlook on the economy and the need for further interest rate hikes. Another .25% rate hike is generally expected in December, bringing the total number of hikes in 2018 to four. But what about the pace of hikes in 2019? The Fed’s job is to raise rates in order to keep pace with stronger economic growth and rising inflation. But we all know that Fed rate hikes usually end up choking off economic growth and helping bring on economic recessions. So they have a tightrope to walk.

The US stock market clearly doesn’t fear escalating trade tensions between China and the US. The two sectors most exposed to potential damage from high US trade tariffs—consumer discretionary & technology—are both up 19% in 2018. Gold, usually a fear trade, is down 8% this year. Junk bonds, usually sensitive to deteriorating business conditions, are flat since the trade war begin in March.

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