Some thoughts on 2019

  • Equities will be volatile and the bear market is upon us:

If indeed Sept was the top of this bull market and we are headed into a well needed reversion to the mean; expect 2019 to be a volatile and dangerous year for equities and risk assets across the board.

$SPX Monthly Bars

  • Structural flaws will become apparent in the leveraged loan/high yield market:

The massive stimulus provided by Fed policy since the GFC, in combination with historical low interest rates has lead to massive credit expansion in the corporate sector (not to mention govt borrowing). Leveraged loans are the hot new topic and could pose threat to the financial system in the coming year. Typically troubles emerge in the risk debt market, exposing structural weak points.

Non-financial corp debt

  • The Fed will slow:

In the Oct Powell commented that rates were “long way” from neutral, indicating that many further hikes should be expected in the coming year(s). Equities were not pleased, Oct marking the beginning of the market sell off we see continuing today.

In Nov Powell took back some of his hawkishness and indicated that rates were “just below” the long run estimate for neutral.

The recent Dec FOMC press conference was greatly anticipated as participants speculated on Powells ability to err dovish and try to calm the markets. A fourth rate hike was greatly expected and Powell came through (markets sold). While many were expecting a dovish hike, Powell was more hawkish in tone indicating that Data Dependence was the Feds method of analyzing conditions and that 2 more hikes should  be expected in 2019. Markets did not like his comment on letting the balance sheet runoff on “autopilot”.

Powell is watching the S&P, but more importantly global growth. Further weakness in the euro zone will lead to a reevaluation of the correct monetary policy. With inflation consistently undershooting the Feds 2% target and the recent selloff in Oil (decreasing inflation expectations), it seems hard to believe Powell is too worried about inflation.

 

Thanks for reading,

 

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