By Don Schreiber, Jr. – WBI Founder and CEO
With 2018 stock market performance ending on a sour note, it’s difficult for investors to see the light at the end of the tunnel. The good news is if the Federal Reserve (Fed) wakes up and realizes the mistakes they’ve made thus far, we could be in better shape for 2019.
In my opinion, the Fed has to be finished raising interest rates. It is quickly approaching time for the Fed to start cutting rates — as I believe they will be hard pressed to increase rates further in 2019. With the eighth rate hike of this cycle in December 2018, the Fed has increased its Federal Funds Rate from just 0.25% to 2.50%, which represents a staggering 900% increase.1
If the Fed starts easing instead of tightening, the markets could rocket towards the end of 2019. We could avoid an additional market sell-off if they realize their policy mistake, abandon future rate hikes in the first half of 2019, and start to move rates lower by year-end. Once they move from tightening to easing the markets should respond as investors become comfortable that the Fed is supporting asset prices. Our current problem in the U.S. is the lack of economic growth. As an economic leader, the U.S. must guide the rest of the world to faster growth through the right policy development and easing of the Fed.
In addition to Fed support, the U.S. economy also needs fiscal stimulus for infrastructure in order to get back to sustainable growth. We have a trillion dollar funding need for the U.S. government, and political parties in Washington are worried about the 2020 elections when they should be focused on allocating taxpayer funds to boost the economy. The year-end government shutdown that unnecessarily increased economic and market risk and compounded investor anxiety is the result of a divided house. This has cost government contractors millions in revenue per day. There are steps the Fed can take in order to better allocate their assets. Step one could be to peel off $2 trillion of the extra $3.5 trillion on their balance sheet to fund a national infrastructure bank that could be managed as the primary funding source for long-term infrastructure needs. Partnerships with states and private industry could also extend the funding.
The U.S.-China trade war talks have become seemingly positive as of late. The extension of the meetings indicates that both parties seem serious about coming to a conclusion that benefits both countries. As of now, China’s growth continues to slow as their economy contracts. The trade war is contributing to overall slowing global trade, and is impacting economic growth.
If Chairman Powell doesn’t initiate further rates hikes, the U.S. settles on a trade resolution with China, and if we get a modicum of infrastructure spending, we could have a continuation of this long growth cycle along with a resurgence in bull markets.
Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don Schreiber, or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
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1“Housing Starts: Total: New Privately Owned Housing Units Started.” FRED, Federal Reserve Bank of St. Louis, 17 Oct. 2018