There are over 14,000 McDonalds in the lower 48, simple math would tell us there are roughly 290 per state. Take a drive and I am sure you will see a few in your travels. The McFarthest Spot happens to be in Tonopah, Nevada. It is the farthest distance you will travel between two McDonalds; 135 miles of driving or 120 as the crow flies. When you Google McFarthest spot you will find page after page of articles, blogs, and videos. One blog discusses the closure of one McDonalds which increased the distance to the McFarthest Spot. On the map below you will see Tonopah with the orange star.
We are off to a great start to the year, having a great McQuarter. The positive first quarter was not without some down days, but the McFarthest spot from the end of 2018 seems quite a distance. When markets correct like they did in the final quarter of 2018, a pop like we had in the first quarter of 2019 is not all that unusual.
The quarter was led by REIT’s as we saw interest rates drop. Real estate and interest rates tend to have an inverse relationship. Domestic stock indices enjoyed double-digit returns, while international assets were in the high single digits. Again, no surprise the market snapped back as 2018 finished with the worst yearly losses since 2008. The Brexit “can” was kicked from the March 29th deadline, the 100th straight month of increased employment, small business hiring broke its past record and the Fed kept rates steady. All these lead investors to believe the threats of last year are out in the distance.
It is not a big surprise the Fed left rates unchanged as the bond market has been saying that for some time. In fact, the bond market is suggesting a rate reduction this year (see chart below). Not only is the bond market suggesting a reduction in rates, but so is prior Fed Chair Janet Yellen as well as Economic Advisor Larry Kudlow.
The chart below illustrates the downdraft in the 10 and 2-year Treasury yields since October of 2018. Mortgage rates also dropped dramatically, possibly extending a gift to the slowing housing market.
With interest rates dropping as we go out along the interest rate curve, many are watching the inversion of 2 over 10-year yields. Has the McFarthest spot shrunk on the next recession? During chairman Powell’s news conference, he noted that part of the Fed’s decision to hold rates steady was a noted slowdown in consumer spending as well as a slowdown in business investing. Is the Fed concerned with the economy’s growth, or are we at their perfect equilibrium…we shall see?
US interest rates are low, but compared to others, we are the “cleanest dirty shirt.” Looking below at German rates you will see they offer actual negative yields. You lend your money to the German government and you will receive less at the end of the term. US yields look downright stunning compared to German Bunds.
United States Yield Curve
German Yield Curve
If the markets were to drift sideways from this point forward, it would be a great year. We do not anticipate that happening, but we do think pieces are in place for a good year. Rates are low, as are inflation and unemployment. Could there be disruptors? Absolutely. The Fed should not be a factor, but trade could be. There is progress on trade talks as of last week, so that is good. We do not like the shape of the yield curve. Could this time be different? Possibly, but it is worth watching. The Fed is seeing some disruptions in the economy, so we will be cautious also. As they say, “adventure may hurt you, but monotony will kill you.” As we traverse through these markets to our Spot, let’s remember the line is not always straight.
Enjoy your April, and we look forward to speaking with you over the next couple of weeks.
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