Stocks are mostly flat this week, as the S&P 500 maintains above the key 2,800 technical indicator on positive sentiment but mixed fundamental data. The much-anticipated Federal Reserve meeting had all eyes on Washington, where Fed chair Jerome Powell delivered the board’s current policy decision and updated forward guidance. In a perplexing announcement, the Fed revealed there would be no more rate hikes expected for 2019, and only one more in 2020. Additionally, they anticipate ending the runoff of their balance sheet this Fall, further finalizing their monetary tightening campaign. Investors responded with mixed feelings, as bonds soared and equities bounced between gains and losses. The news only clouded further current data from global sources, which seems to show weakness but muted remaining optimism. Adding to the noise, Brexit remains completely uncertain at this point, with the deadline of March 29th approaching quickly and Theresa May fighting for a delay deal. Finally, reports that China officials were rolling back promises on the trade deal rattled investors further.

The ongoing divergence between stocks and bonds continues to concern us, as bond prices rise with signs of slowing economic growth and the Fed on hold or even cutting rates ahead, and stocks pushing ever higher off of the December drop. Both sides can’t be right forever. Ultimately, there has to be a winner between bond and equity strategists, with either rising yields in the face of a stronger-than expected rebound or lower stock prices following a further slowdown. Our base case is somewhere in the middle, with equity prices likely to experience some volatility and downward pressure and bond yields likely to rise once recent soft economic data turns around. That being said, longer term, a recession does seem likely within the next several years, making a balanced approach more appropriate at this time.

For now, we have trimmed US equity positions given the recent rise in valuations and the gloomy outlook across global economic indicators. The Fed’s signaling of their own fears for the expansion lend us to believe that the slowdown that is occurring may not be fully priced into the market, and a retrenchment is likely in the weeks and months ahead, where better opportunities might emerge. Lingering questions over Brexit and the recent hiccup with the US-China trade spat don’t bode well for risk assets, and profit recession could be revealed in the next several weeks during 1st quarter’s earnings season. Adding further headwinds to equity markets, share buybacks will come to a screeching halt over the next month, as the blackout period for repurchases begins during earning season. Given all these factors and the positive sentiment built into equity valuations, we could be set up for a reversal if the ball drops on any of these potential hotspots. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.