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2019 is nearly here, and that means it is time to roll out my ten predictions for the new year. As I did last year, I will start with number 10 and work our way up to number 1 over the final month of 2018. Enjoy!
Prediction Number 10: The Fed Will Not Raise Rates In 2019
The long-standing sentiment on Wall Street has been a rate hike in December, followed by as many three rate hike in 2019. But I have reasons to believe the Fed will not raise rates at all in 2019.
Inflation fears may be in the in the rearview mirror in 2019. Oil prices have plunged since the beginning of October, dropping from about $76 to nearly $50 as of November 30. The decline in the price of oil will drag inflation gauges such as the producer price index and the consumer price index sharply lower. The chart below shows the correlation between the PPI and oil prices.
Slowing Home Sales
Pending home sales have fallen sharply in recent months as mortgage rates have climbed.
30-year mortgages rates have hit their highest levels in years. I know some old-timers will say “5%, what’s the big deal, when I bought my house I was paying like 10 or 12%.” But one should remember that Housing prices have risen an awful lot, and it isn’t necessarily the rate of interest or the price of the home that is the deciding factor in buying a house. It is the monthly payments. So when rates go from 3.5% to 5%, those monthly payments go up an awful lot.
Jobless Claims have been on the rise too. That can’t be a good sign for the future unemployment rate.
Additionally, there are now signs that GDP growth is moderating. GDPNow is tracking fourth quarter GDP growth at 2.6%. Meanwhile, the CNBC rapid update suggests fourth quarter GDP is tracking at 2.8%. That is down from 4.2% in the second quarter and 3.5% in the third quarter.
Additionally, earnings estimates for 2019 have been falling over the past few months. According to S&P Dow Jones Indices earnings for 2019 peaked at around $177 per share in August and have since dropped 1.7% to $174 now.
The market’s expectation for future rate hikes has fallen in recent weeks. The odds have increased to nearly 40% that the Fed Funds rate is between 2.5% and 2.75% by the end of 2019. That would mean the market is beginning to price in just one rate hike in 2019, should the Fed raise rate this December.
The Yield Curve
If the Fed continues to raise rates the yield curve will likely invert. The spread between the 3-month and 2-year yield is now 40 basis points. Should the Fed raise rates again in December the spread is likely to contract further unless 2-year yields continue to rise. But, there is a problem, because the spread between the 10-year and the 2-year yields is about 22 basis point wide. If 2-year yields start rising the yield curve will come very close to inversion. That would likely send a message of a looming recession to the stock market. That will Fed will likely be careful not to send that message.
Based on all the evidence above I come to prediction number 10 – no rate hikes in 2019.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.
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