As we get rolling on a new year, I wanted to share a few economic themes that I’ll be following this year. Of particular interest to me in 2019 are:
- Federal Reserve’s posture on raising the federal funds rate.
- Housing, specifically new home starts.
- Yield curve
The interest rate situation dominated 2018. In January 2018, the Federal Reserve increased the federal funds rate by .25% and announced that we should expect 3 more rate increases in 2018. The stock market responded by dropping 10.1% over the next 14 days. Ouch! They were true to their word, and we saw four rate hikes last year. However, near the end of the year the Federal Reserve moderated it’s expectation for 2019, which came as welcome news on the stock market. We ended the year with a federal funds rate of 2.38%, with guidance of 2.88% by the end of 2019. Because of the effect interest rates have on the overall economy, I’ll be curious to see where we end in 2019.
Housing has been a sore spot on an otherwise strong economy. New home building completion for October 2018 was 3.3% below the September 2018 number, and 6.5% lower than the October 2017 housing completions.1 Performance on the stock market was not improved, the Dow Jones US Select Home Builders index was down 30.73% for 2018. Housing is not top of the mind for most people, but it is an interesting dilemma if most of the economy is doing fine, and housing is playing catch up. Let’s see what happens in 2019.
The yield curve is simply the line on a chart that follows interest rates, starting with short term rates on the left, all the way out to 30 year rates on the right. In a “normal” yield curve, it will start near the axis, and move higher with longer rates. This makes sense. If you were going to buy a bond, you’d require a higher interest rate if you were keeping it longer. With an “inverted” yield curve, longer term rates are actually lower than short terms rates. This is a sign of an unhealthy economy. At the end of 2018, the 2 year rate was 2.48% and the 10 year was 2.69%. Over the last year, 2 year rates have increased 29%, but 10 year rates increased only 9.3%2. Since 1962, these rates have “inverted” nine times. Of those nine events, a recession has followed 7 times3. In 2019 the 2 year and 10 year rates may not invert, which would be good, but it will be worth watching.
I hope 2019 is an exciting and fulfilling year for you and your family.