In last week’s commentary, I wrote the following:

“So how will stocks, bonds, and other assets respond to the Fed decision? I believe that the Fed will under-deliver, effectively disappointing growth stock enthusiasts. It will be 25 basis points and a whole lot of vague references to data-dependence.

The likely result? Bond yields will continue to drift lower over the weeks ahead, compelling the Fed to cut again in the near future. This will be positive for yield sensitive assets like iShares Core Treasury (BATS: GOVT), Van Eck Preferred Ex Financials (NYSEARCA: PFXF), Invesco S&P 500 High Dividend Low Volatility (NYSEARCA: SPHD) and Vanguard Real Estate (NYSEARCA: VNQ).

While the near-term may see the S&P 500 struggle for direction, if not correct 4%-5%, the promise of future Fed stimulus may keep broader market indexes from dropping further. At least for now.”

Not a perfect take, but pretty darn close. When the rest of the world is aggressively easing, and Fed Chairman Powell talks about a ‘mid-cycle adjustment,’ you’re going to get a fair amount of volatility.

The 30-year U.S. Treasury yield is near an all-time record low. The 10-year U.S. Treasury yield only has less than one-quarter of a point to go. This will likely force the Federal Reserve to cement a new easing cycle, as opposed to the original notion of an insurance cut within an enduring economic expansion.

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Many would argue that the stock correction is modest in the context of extremely positive year-to-date results. That’s accurate.

What those folks have neglected to identify, however, are the better-performing assets since the credit cycle peaked in October 2018. They have been too busy talking up the new all-time highs for the S&P 500 and Nasdaq.

Late credit cycle assets have been relative outperformers since the Fed tightening train hit its brick wall in October of 2018. Treasury bonds, higher-quality investment-grade bonds, preferred stock, REITs and dividend producers — they’ve been less volatile and better for portfolios than riskier junk bonds and broader equity barometers.

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Those who express confidence in the resilience of the U.S. economy are not wrong. Our consumer-based expansion has been surprisingly durable for 10 years and three months.

On the other hand, the world’s recessionary pressures can spread to our shores. At the moment, influential economic powerhouses are struggling with sub-50 PMI readings. (Note: Below 50 implies contraction.)

China: 49.7 (3rd consecutive below 50)
Japan: 49.4 (3rd consecutive below 50)
Korea: 47.3
Europe: 46.5
UK: 48

Granted, stocks are behaving themselves (more or less), largely because there’s a widespread belief that the Fed can fix anything. The shift from monetary tightening to monetary neutrality in December-January helped confirm that bias.

Yet the SPDR Gold Trust (GLD): SPDR S&P 500 (SPY) ratio is rising the way that it did in the 4th quarter of 2018. And spot gold has cracked $1500 from lower spot prices for the first time since early 2011. Those are safe haven indications, not “risk-on” endorsements.

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Will a Fed shift from monetary neutrality to monetary easing, as the global bond market is demanding and as the White House is lobbying for, serve as a magic elixir? I’m not so sure.

Consider the sad reality that sovereign debt all the way out to 20-30 years in Germany, Switzerland, and Japan have negative yields. Their economies are not responding to monetary stimulus.

In contrast, the U.S. economy might hang in there if we witnessed quick resolution on trade agreements and the Fed immediately revisited zero rate policy with more QE. Getting 30-year mortgages below 2.5% might encourage consumers to buy the largest big ticket item of them all: homes.

Keep in mind, I am not suggesting that the Fed should act. On the contrary. Recessions are a natural part of cyclicality. Worse yet, ill-advised central bank manipulation is the primary reason why we’re looking at the third bubble in the 21st century.

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Nevertheless, consumers, businesses and governments have become hopelessly addicted to monetary and fiscal policy stimulus. The sooner the “fix,” the more likely the current U.S. expansion can endure for a while longer. Absent the “fix,” the more likely we will witness severe asset price depreciation.