The US equity market rose briefly after the Federal Reserve took a 2019 interest-rate hike off the table at 2 pm on Wednesday, then fell, and then rose sharply on Thursday morning with no new information. Investors are trying to work out whether cheap money is good for stocks, or whether the ugly economy (which motivates cheap money) is bad for stocks.

On Thursday it leaned toward the former interpretation. Tech stocks were the clear leaders, with Apple, Texas Instruments and the chipmaker Nvidia at the top of the list of US gainers, and the big banks at the bottom. The bashing of the banks followed through from yesterday; banks don’t like low interest rates and a flat yield curve. Slack loan demand forces banks to increase holdings of US government securities, as the chart below shows. Lower Treasury yields cut directly into banks’ interest income.

The dual mandate of the Fed used to be price stability and full employment. Now the dual mandate is easy liquidity conditions and high asset prices.

There are two schools of thought about the state of the US economy; one holds that the collapse of retail sales in December and the sudden stop in job growth in February were temporary blips, and the other holds that they indicate a sharp slowing of growth.

Fed Chair Jerome Powell made clear that he is in the pessimistic camp, as I reported yesterday. The Fed is scared of slower growth, and its 2019 GDP forecast stands at 1.9% to 2.2% vs. the Trump Administration’s 3.0%.

Investors will look closely at tomorrow’s Purchasing Manager Index reports for information on the actual state of the economy. The only economic report since the Fed meeting came from the Philadelphia Federal Reserve, which showed a sharp drop in orders and capital investment in the Philadelphia district, a very small sliver of the US economy.

The most interest-sensitive portions of the US market benefited the most. VNQ, the widely-traded real estate investment trust ETF, was up 1.8% vs. a 1% gain in the S&P 500.

Uncharacteristically, Chinese stocks lagged the overall US market. The popular large-cap H-shares vehicle FXI was unchanged on the day while the MSCI China ETF was up just 0.14%. The lag in Chinese shares is largely due to disappointing profits reports from China Mobile and Tencent.

The greatest risk to the US economy, I have argued for the past year, comes from US households, the most important source of demand for the world economy. That is true for upper-income households as well as lower-income households.

The Wall Street Journal reported today:

“Originations for jumbo mortgages, which are loans too big to be sold to Fannie Mae and Freddie Mac , dropped 12% last year by dollar volume, outpacing the 7% decline in mortgages that meet the standards for Fannie and Freddie’s government backing. The $281 billion in jumbo originations was off 27% from its post-crisis peak two years earlier, according to Inside Mortgage Finance, an industry research group.”

Household behavior is notoriously difficult to forecast. American consumers have a mind of their own, and their unexpected caution during December may be a harbinger of a retrenchment that will reduce growth (and corporate profits) sharply during 2019. I would continue to err on the side of caution.

Biogen was the worst performer in the S&P 100 after the end of trials of its Alzheimer’s drug. I can’t remember if I recommended it or not.