By Greg Valliere
Horizon’s Chief Global Strategist

May 30, 2018

WE’VE BEEN ON THE ROAD for much of the spring, blown away by how strong the economy is in most of America – the insanely hot housing market in California, the dynamism of Seattle, the extremely tight labor market in Austin and Charlotte and Nashville.

ONLY IN THE NORTHEAST are economic conditions simply fair – good jobs are still spotty, the infrastructure is terrible, states are poorly run and over-taxed, opioids are a scourge, and support for trade protectionism is popular. But even in this region the economy is growing and should benefit from gasoline prices falling later this summer.

YET THERE ARE SOME ANALYSTS who believe a recession is possible by year-end. Really? With unemployment now at 3.9% and headed lower? With massive fiscal stimulus likely to boost GDP to the 3% neighborhood by late summer? But some analysts who predict a slowdown point to the sharp drop in the 10-year yield.

INTEREST RATES HAVE PLUNGED not because of a fear of recession, but because the U.S. is still the world’s safest haven in times of uncertainty – the Italian crisis, incoherent U.S. trade policies, continued anxiety over Korea, etc. Rates are not falling because a recession lurks, they’re falling because of an insatiable demand for Treasury paper.

WHAT A GIFT TO JAY POWELL: A ten-year yield below 2.9% gives him wiggle room to signal a go-slow policy. The Fed has essentially told the markets that it will hike rates on June 13, and markets don’t like surprises. We wouldn’t be shocked if market rates don’t budge after this next Fed move; the FOMC statement will not be hawkish because inflation still isn’t worrisome.

INVESTORS WE SEE AROUND THE COUNTRY are smart enough to divorce the solid economic fundamentals from the dysfunction in the White House, Robert Mueller’s probe, trade disputes, etc. There’s plenty of things to worry about, but a European contagion that somehow could affect the U.S. is not one of those things. Actually, European anxieties simply contrast with U.S strength and the dollar’s appeal.

TRAVEL AROUND THE COUNTRY – get out of Washington and New York and Chicago – and you’ll be amazed by how dynamic the economy is. It’s booming in much of the country – hopefully not overheating, but that’s a risk.