The ‘pause’ in the rally from yesterday’s early highs is continuing this morning as equity markets around the globe are all trading moderately lower, including the US.  

Beware of the consensus. As data and economic models have proliferated throughout the years, investors have increasingly become reliant on them to predict future events. If the ‘market’ or excel model says it’s going to happen, then we are all too ready to take it as a given. A perfect example is the path of Fed policy. With the futures market increasingly pricing in the likelihood that the Fed will cut rates, that’s what everyone now expects. As of this morning, for example, the futures market was pricing in a greater than a three-quarters chance that the FOMC will cut rates between now and the end of July. Three weeks ago, those odds were less than 15%!

So, it’s pretty much guaranteed that the Fed will cut rates and cut them aggressively right? While it’s certainly possible that we may see rate cuts in the months ahead, keep in mind that the consensus often gets it wrong and sometimes incredibly wrong. A perfect example is the 10-year US Treasury yield.  The chart below is from a Wall Street Journal article earlier this week and shows how when it came to the direction of long term interest rates in 2019, the consensus couldn’t have been more wrong.

The chart shows the path of the 10-year yield so far in 2019 compared to various forecasts from Wall Street and the economic community. At the end of 2018, not a single economist expected the 10-year yield to be below 2.5% and the average forecast was closer to 3.0%. Right now, the 10-year yield is under 2.12%!