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Are We There Yet? Data Map Out Room to Run

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  • We believe that the S&P 500’s high for the year is around 3200, approximately 9% from current levels.
  • Interest rates should remain favorable for the foreseeable future. Inflation’s 12-month rate for March was 1.9%, although off its recent low of 1.5%, is still in Feds acceptable band 1.8-2.2%. Our belief is that the Fed will pay much more attention to inflation going forward as the absence of inflation should keep interest rates muted. There are two caveats to our interest rate view: 1) Food and Energy costs have recently increased more than expected and 2) interbank lending rates are nearing the Fed’s upper limit. That could cause the Fed to increase the range by 20-30 bps. The increase could put pressure on the 10 Year treasury rate by a similar amount.
  • 2019 economic growth is expected to improve from early estimates. GDP growth for 1q2019 was initially estimated at 2.2%. More recently, estimates have started to increase to mid-2% range. Improved economic outlook also seems to be reinforced by above expected earnings of +5% and improving year-ahead outlooks. The indication is that GDP will be in 2.5% range for 2019, well within the Fed’s ideal growth range of 2-3%.
  • China’s economy is also performing better than expected for 1q2019 1.4% vs. 1.2% initial estimate. The U.S. delay to trade tariffs seems to have decreased the negative impact to q1 growth. The prior two years first quarter grew at 1.5%. Improved trade negotiations will be critical to full year growth.

We believe the S&P 500 still has room to run in 2019.

Based on our S&P 500 Market Estimator model, we believe the index will continue to rise into the 4th quarter. Currently our year high estimate is around 3200 or 9% higher from current levels. Therefore, we recommend investors stay fully invested in U.S equities. All sectors are “On” except healthcare.

Exhibit 1. S&P 500 Estimator

QID S&P 500 Estimator

 

Interest rates should remain favorable for the foreseeable future. Quarterly inflation appears to be below average.

Our belief is that the Fed will pay much more attention to inflation going forward and less about GDP to manage interest rates. Quarterly inflation for 1q2019 0f 0.18% remains low versus historical average and median levels of 0.83% and 0.75% respectively, from 1974-2019 (see exhibit 2 below).

Exhibit 2 Quarterly Inflation 1974-2019

However, the data point that we will have to watch closely is the monthly inflation rate, see exhibit 3. March was much higher than the average or median levels from 1974-2019 at 0.63% vs 0.48% and 0.41%, respectively (see exhibit 3).

Exhibit 3 Monthly Inflation 1974-2019

(continued)  |   DOWNLOAD RESEARCH

Are we there yet

MORE ABOUT QUANTITATIVE INVESTMENT DECISIONS

 

 

 

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