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Taxapalooza, Indecisive Yield Curve, and the RSWA NCAA Winner!

No one likes taxes, but it's something we all have to deal with this time of year.  So this week's Friday Buzz includes both practical and interesting tax articles, as well as some funny tax quotes and comics – because sometimes you just have to laugh… 😊

Enjoy this week's The Friday Buzz, and get those tax returns in!

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Happy Bull Market Anniversary, Fed Two-Step, Home Planning (and more)

It’s official. At ten years, the US. stock bull market is the longest in our history. Does a slowing economy present a credible threat to stock investors? Both Washington and Wall Street have eyes on the Fed, which will have a major say. We get into all this and more and appreciate your interest. Feel free to forward to anyone who might be interested.

  • Slowing U.S. Economy: Economists generally expect the U.S. economy to grow around 2 percent in 2019. Ruchir Sharma, the Morgan Stanley chief global strategist, makes a compelling case for why this growth rate is both sufficient and not that far off long term growth rates. Charles Evans, the Chicago Fed President, says the chances of a recession are low.

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This Week's Big News Movers Plus Articles on Procrastination and Clean Energy Storage

It has been a HUGE week in terms of big news events.  The Mueller investigation concluded, the yield curve inverted, and the Brexit deadline is today – yikes!  You'll find articles on those weighty topics along with some interesting and fun articles to balance out the reading in this week's The Friday Buzz.  As always, thank you for reading, and please share! 

  • The Mueller Investigation Concluded:  After twenty-two months, the Special Counsel concluded the President's 2016 presidential campaign was not involved in Russian election meddling.  That political fight is now over, it's sure to be replaced by other political fights though they won't have the same gravitas.  I believe President Trump was spotted doing victory laps around the White House this week…

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Fed Leaves Rates Unchanged As Economy Slows (and More!)

The Fed chose to leave short term rates unchanged at the FOMC meeting this week, announcing that it did not foresee more rate hikes this year. The decision and announcement reinforce that the Fed is increasingly wary of current risks and is signaling that it will keep its foot off the interest rate brake indefinitely. Apart from the Fed and the economy, we encourage you to check out some interesting planning notes (e.g. Roth IRAs and retirement) and lifestyle notes relating to health and happiness as it relates to location. 


  • Why the Fed Turned Dovish: Nouriel Roubini, the widely followed NYU economics professor,  offers his insights into why the Fed has abandoned, at least temporarily, its plan to hike short term rates higher.

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Earnings Beat Expectations to Date and Deciphering the Fed (and More)

We attributed the strong January stock rally to a bounce back from the December over-selling that occurred in the equity markets and to the Fed declaring its intention to pause future rate hikes, a stock friendly re-messaging. Earnings season is on us and will be a key driver in near term stock market performance. To date, fourth quarter earnings reports have not been stellar but are largely beating expectations. We also want to revisit the Fed decision to pause rate hikes in the context of an astute question recently asked by a client.

  • Earnings Beating Expectations: We know that over time stock returns correlate closely with corporate earnings, adjusting for inflation. The current situation appears to be a period when exceeding expectations matters as much or more than objective earnings. It’s as if investors are exhaling, noting that earnings may not be great but are better than feared. This NYT article illustrates the dynamic.

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Positive Fed and China Trade Talk News Propels Stock Markets to Strong 2019 Start

Two important developments have boosted stock markets in the new year. First, the Fed has adopted a more dovish tone relative to additional rate increases in 2019. Second, negotiations between the U.S. and China have apparently been successful in narrowing the trade differences. The relief felt by equity investors is palpable. Perceived risk may have fallen but lurks near the surface of investing waters. Caution is warranted. 

  • Powell’s Do-Over: Fed Chairman Powell softened his tone on future rate increases in a recent speech, realizing that the Fed needs to project more flexibility. With inflation in check, we see no reason why the Fed needs to engineer a recession with unnecessary rate hikes at a sensitive time.

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Positive Economic Fundamentals vs. Negative Investor Emotions

Concerns about the slowing global economy and increasing short term interest rates are valid. However, the fear that likely drove the substantial December stock sell-off appears disproportional to the actual risks to the economy and earnings. Slower economic growth does not equate to a near term recession. What might have been a relatively mild correction was unquestionably exacerbated by a general sense of Washington instability. The massive gain in the U.S. stock market, this past Wednesday, may reflect the perception that the market is oversold, but it is too soon to have any degree of conviction. Given the market volatility and the holidays, the notes this week are few in number and market focused.

  • Economy Is Strong. Leadership Is Shaky: This NYT article makes the case that leadership missteps are part of the problem. We agree. The global and U.S. economies are slowing but do not appear to be imminent danger of going into a recession.

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The Fed Raises Rates, Europe Ends QE Purchases, and Champagnes for the New Year

There is an old axiom in the investment world, "Don't Fight the Fed."  It means if the Federal Reserve is using monetary policy to grow the economy, then don't fight the growth, and vice versa.  The investment world paused on Wednesday to listen to Jay Powell, the Federal Reserve Chairman.  This was probably the most anticipated Fed meeting of the last few years.  The whole investment world was listening, because who wants to fight the Fed?

Thank you for taking a few minutes of your time to read and share The Friday Buzz

  • The Fed Raises Short-term Interest Rates:  On Wednesday, the Fed announced it was raising the short-term federal-funds rate a quarter of a percent to a range of 2.25% - 2.5%.  This marks the ninth time the Fed has raised the benchmark since December 2015.  The Fed also felt they would not need to raise short-term rates more than two times next year and the path of future increases was uncertain.  In their released economic projections, the Fed stated they expected core inflation of 2.0% over the next three years, down slightly from 2.1%, and GDP growth of 2.3% in 2019, down slightly from their previous expectation of 2.5% They also expect unemployment to remain low and their long-term growth projection for the U.S. economy remained in the range of 1.8% - 2.0%.  

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The Flipping Yield Curve, Recessions, Healthcare (and More!)

In these notes, we reward those of you who have been clamoring for more on the yield curve. Ok, that’s a lame attempt at economic humor - it’s entirely possible that no one has ever clamored for more on the yield curve. But the yield curve is back in the news and is quite important to understanding financial markets and potentially recessions, so we dig into it again. Since reading about the yield curve can be a slog, in a word, we’ll reward our readers by taking a break from talking about China and trade. The news on that topic tends to go up and down by the week, and I expect that we’ll return to it soon as it’s a market mover.

  • Back to the Yield Curve Future: An inverted yield curve, meaning that short term interest rates have moved higher than long term rates, has been a reasonably reliable predictor of a coming recession. Within the last week, the 2 Year Note yield edged higher than the 5 Year Note yield, causing some consternation. As I write this, the yield on a 2 Year Treasury Note is the same as the yield on a 5 Year Treasury Note at 2.77%. We believe, however, that the appropriate yield curve comparison is the 3 Month Treasury Bill rate at @2.4% to the 10 Year Treasury yield at @2.9%, still a healthy positive slope. This San Francisco Federal Reserve Bank paper explains why.

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Fed Gives Guidance, China and G20, U.S. Economy (and more)

With the Fed signaling that it may slow the pace of interest rate increases, the stock market is getting some good news. Concerns like trade conflicts and Brexit remain but knowing that the Fed is flexible when it comes to pushing rates up bolsters the positive case for equities.

Thanks to all who read these notes. We enjoy writing them and endeavor to make them worthy of a modest time commitment on your part.

  • Powell Boosts Markets: Fed Chairman Powell indicates that rates are slightly below a "neutral" level. In lay speak, this means that current rates are close to the point that they neither encourage nor discourage economic growth. It signals less tightening in the form of rate hikes for the foreseeable future. We anticipated this “signal” but are still reassured to hear a public statement, given the headwinds facing the stock market. 

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