While equity and fixed income investors have experienced a bit of “whiplash” during the month of February, consumers have continued to feel “pretty good”, if not very good. In fact, the U.S. Consumer Confidence Index for February came in at 130.8 – its highest level since November 2000. Similar results in other economies have also been registered. As the U.S. economy, as is true of most of the world’s major economies, is largely driven by consumption, having a “happy” consumer should bode well for future economic growth.

With a happy consumer powering the economy, has the Fed done anything yet with monetary policy which might cause a recession? In the following chart there are two curves – the Blue curve looks at the real cost of money (i.e., is money expensive as evidenced by high inflation-adjusted interest rates?) and the Red curve looks at the bond market’s anticipation of a recession (reflected in the slope of the Treasury curve, where if the slope is negative, bond market investors believe a recession is implied and vice versa). As the reader will note, the Blue curve has just touched zero after being negative for quite a few years. So, money is cheap! Further, while the Red line has gone down, signaling a less positive Treasury slope – the slope is still positive. So, no recession is in sight, according to bond market investors.

Volatility is back and we would expect more over the remainder of 2018. Nobody doesn’t enjoy “upside” volatility. It is the “downside” volatility that unnerves – but it is a fact of an investor’s life. Asset prices go both ways. However, we still believe that stock prices, here and abroad, are underpinned by solid fundamentals reflecting synchronous world economic growth. Bond prices, on the other hand, will be pressured by increasing short term rates from the Fed.