Supportive monetary policy from the Fed is nothing new. In fact, it has been the norm ever since the financial crisis.
After the financial crisis, the Fed slashed rates to zero and launched three quantitative easing programs, also known as “QE.” This largely accommodative stance helped spark the longest bull market in U.S. stocks history as companies used those low rates to fund expansion and, most importantly, buy back their own stock. The S&P 500 is up more than 300 percent since is post-financial crisis low.
However, some investors worry the Fed may not be able to shield the stock market from the next downturn, which could be around the corner.
U.S. economic data have been weak recently. The Citi Economic Surprise Index is deep in negative territory and recently hit its lowest level since the summer of 2017. A negative read on the index signals economic data are underperforming economist expectations. The Fed itself also trimmed its economic growth forecast for 2019.
Investors have been loading up on Treasurys as the U.S. economic data weakens. The benchmark 10-year yield hit its lowest level in a year on Wednesday following the Fed’s announcement. Treasurys are considered a safer investment than equities.
Slower economic growth “will make its way into corporate balance sheets. It will be reflected again in corporate earnings,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “Previously when that happened, the Fed was able to start a QE2 or QE3 and then reinvigorate corporate earnings. But 10 years after the last crisis, they may not be able to do that trick again.”
Corporate profits are expected to be lackluster for the first quarter of 2019. FactSet data show analysts expect first-quarter S&P 500 earnings to fall a year-over-year basis.
Some companies, including FedEx, UBS and BMW have all issued negative commentary on their quarters and the rest of 2019. FedEx’s CFO said earlier this week that “slowing international macroeconomic conditions and weaker global trade growth trends continue.” BMW also said it seeks to cut more than $ 13 billion in costs this year while UBS said the first quarter could be one of its worst one’s ever.
“It’s important to look at what FedEx said and they’re saying growth is slowing,” said Thomas Thornton, president and founder of Hedge Fund Telemetry. “Stocks are bid higher on this hope for a second-half recovery. I just don’t think the Fed is seeing a second-half recovery if they are pausing like this. I think they’re seeing some risk and that is with a lot of debt.”
But for now, stocks continue climbing. The Dow Jones Industrial Average rose more than 100 points on Thursday, powered by shares of Apple.