The first print of 2019 U.S. domestic product growth (GDP) for Q1 ending March 31 came in at 3.2%! This is the best surprise from April because market estimates were only looking for 2.0%. In an April 18 interview with the Wall Street Journal, Dallas Fed President Robert Kaplan said, “Yes, we can grow GDP at 3% + without inflation running away from us.” The final read on 2018 GDP growth came in at 2.9%, so the first quarter of 2019 is off to a stronger start than the final number from 2018.
The U.S. first quarter economy grew faster than expected despite resistance from the longest U.S. government shut-down in history and slowing global growth. With corporate profits also beating expectations, investors have gained confidence that a recession can be avoided. This contrasts with the substantial stock market declines in the final months of 2018, which produced investor doubt about 2019.
The Volatility Index (VIX)
There is a yardstick for expected swings in stock prices known as the Volatility Index (VIX). This gauge measures the speed and severity of the stock market’s moves. The higher the VIX number, the greater the volatility in the market; and volatility scares away investors. On December 24, 2018, the VIX closed at 36. On April 30, 2019 the VIX closed at 13. The speed and degree of this 64% drop marks an historical event.
The VIX is also known as Wall Street’s “Fear Gauge.” This drop in volatility indicates that investor sentiment is very bullish.
The Fed’s Challenge
The Fed has hiked interest rates nine times since 2015. The ninth hike came just this last December. At that time, the Fed estimated that it would hike rates two more times in 2019. Due to the substantial stock market drop in Q4 of 2018 and a substantial drop in confidence by investors – running parallel with a serious global economic slowdown – in March the Fed backed off its “two hike” position. The Fed is struggling to balance low inflation with strong economic growth. Now we have travelled from two hikes in December to no hikes in March to a possible rate cut in 2019. Charles Evans, President of the Federal Reserve Bank of Chicago, asserted in the May 1 issue of the New York Times that rate cuts are possible if inflation falls too low and stays there. The Fed’s rate hike trend is very bullish.