Published April 8, 2019
The last quarter of 2018 was a big disappointment to investors. Beginning in the autumn of the year, the market dropped 18.9%, reaching a bottom on Dec. 24. While not panicking, investors were certainly shaken.
The world economy, including the U.S., appeared to be slowing. To make matters worse, the Federal Reserve, sticking to its script, raised interest rates by a quarter point, extending worries about the economy. The market drop was sharp.
But, as often happens, the market surprises. The first quarter of 2019 was the best since 1998. The S&P index was up 13.1%, the Dow up 11.2% and the Nasdaq up 16.5%. Well, how do you explain such machinations?
In the fall of 2018 it became clear that the global economy was slowing. At the same time, the Federal Reserve believed it was time to raise interest rates. A bit of a back story: after a long time of historically low interest rates, some believed it was time to raise rates; the Fed subscribed to this idea. We have often written here of policy accidents. We have been worried about policy accidents. The Fed, looking at its tea leaves (and its point chart), decided that we needed to go on a rate-raising program. And raise it they did — nine times since December 2016, including three times in 2017 and four times in 2018.
But with the economy slowing, was December really a good time for another increase? President Trump, who considers himself an excellent forecaster, told the Fed not to raise rates. The Fed, which considers itself independent of political pressure, felt cornered, and to show its independence, resolved to raise rates.
They had […]