What You Need to Know in Sixty Seconds
1. A recession is coming, but it won’t start any sooner than 2020.
2. US GDP should increase solidly over 2% in 2019 as we continue to benefit from fiscal stimulus.
3. The weakness of the equity markets in Q4 2018 will continue into 1H of 2019.
4. The S&P 500 will return double-digits in 2019, challenging the highs of 2018.
5. The 10-year Treasury will move above 2018 highs, to about 3.3%.
6. The Fed will hike the federal funds rate twice in 2019.
7. Inflation, as measure be the CPI, will rise from its current 12-month change of 2.2% by about a half-percentage point.
• We are beginning to favor Value stocks a bit more than we have.
• For nearly a decade we’ve been overweight Growth stocks. We continue to prefer Growth on a long-term basis.
• We are not shifting portfolios totally to Value, just putting it in Neutral.
The markets are pessimistic enough that contrarians like us expect a solid rally through year end.
Q4 of a mid-term year (now) and the first half of an election year (first half of 2019) are, on average, the best three quarters for the stock market. However, a flipped House majority softens that historical tailwind.
The sell-off in October had less to do with perceived election jitters and much more to do with real concerns about tariffs and tightening monetary policy.
There is, historically speaking, a one-in-four chance the market drops another ten(ish) percentage points.
There is, historically speaking, almost certainty that the market will surge after mid-term elections.
History aside, we think the most likely scenario is a bit more pain followed by a rally.