The Marathon Continues
• QID believes that we are still in the middle of a long-term Secular Bull Market
• Expect U.S. and China to resolve trade issues by mid-year
• Fed stops raising rates as dual mandate is met at sub 4% unemployment and 2% inflation
• Earnings and Market Regain Strength, S&P 500 +19% for year
The stock market stumbled to close-out 2018. However, we still believe we are in the middle stage of a secular bull market that will last another ten years. In August 2018, we published an article “Market May Rest Before Continuing Marathon Move”. We felt that with the market up almost 7%, upper-end of our expected range for 2018 of +7.45 and -7.89%, that we were fairly-valued near-term. Trade tariffs, rising interest rates, mid-term election concerns derailed the market and we ended the year down 6.24%, bottom of our expected range.
Our expectation is that the U.S. and China will resolve trade issues by mid-year 2019. U.S. and China realize that being the dual global engines of growth that it is in both our interests to solve our differences, a world recession would hurt everyone. Intellectual Property (IP) issues are a big U.S. concern. It is the crux of a technological edge that America cannot afford to lose. China has made tremendous strides in numerous areas of technology that many argue is due to IP theft that has eroded our lead and could cause our companies to lose their industry leading edge. To me, that is the biggest threat to long-term U.S. company’s earnings growth. Many question China’s slowdown because a 6% GDP growth is still one of the leading growth rates in the world. However, many have noted in the past that for China to maintain a full employment level that a 6% plus GDP is needed. I was not surprised to see China announce decreased Imports and Exports for December. Their seemed to be dramatic increase in activity with China the last six months to beat the tariffs. Customers need to digest the inventory. In addition, the new tariffs were delayed in November. The sales cycle will cautiously ramp back up uncertain as to when the tariffs may be reimplemented, if at all. Therefore, there is pressure on China to negotiate a reasonable trade deal as the current fall off in activity is just a taste of the impact of all tariffs being put in place.
Fed stops raising rates as dual mandate is met at sub 4% unemployment and 2% inflation. We believe that the Fed stops raising rates in early 2019. The Feds dual mandate from Congress is to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”. Unemployment is currently below 4% that is considered a full employment level. Inflation ended 2018 at an annual rate of 1.91%. According to the Federal Reserve website “The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment.” So why is the Fed considering any future rate hikes? It appears that the Fed is in-line with their “Dual Mandate”. We believe that the Fed’s current wavering of whether to raise rates further is that they have come to the same conclusion. This should be positive for rates in the foreseeable future and reduce the pressure on P/Es.
(continued)2019 Year-ahead BPO