Employment is strong; we can all agree on that—or can we? I suppose it depends on whom you ask. If you ask the average person, they’re going to say yes. If you ask someone in the mortgage industry, they might have to force a fake smile.
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.
The big story this week is….oh, wait, there are two big stories this week. One is a two-day meeting of the Federal Reserve. The scheduling of the meeting itself is nothing new and not typically, by itself, a big deal. But this one is because the right words could start a rally in stocks. Or, just as easily, could justify the slump.
This column is being written the day after Theresa May delayed the Brexit vote (that was December 10th), the same day the US stock markets experienced a roller-coaster ride where indices plunged to test recent lows of the year only to bounce back up and close in the positive. Given it was a rather crazy day, let’s inspect it for clues about what to expect in the months ahead.
• 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.
For a long time now I’ve been predicting a recession sometime around 2020-2022. On October 3rd of this year I posted an article I wrote on BerkshireMM.com titled “Checking My Homework” to challenge my own theory. In it, I wrote:
“The biggest flaw by economists, in my opinion, is that they try to track the entirety of a $19 trillion economy… the stock market turns down before the economy, but no one tries to improve on the methods to track expectations of the economy and to thus be more in line with where it’s going, as opposed to where it’s been. My way is a better mousetrap.”
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.