Large macro themes are driving market activity in 2019 – all of which have the potential to ca...
The Aden Forecast: "Rates are the Key"
06/20/2018 5:00 am EST
The Fed just raised its interest rates yet again. Interest rates are the most important markets in the world. They move most of the other markets and the economy, and the higher they go, the tighter money becomes, explains Mary Anne and Pamela Aden, editors of The Aden Forecast.
And when the Fed tightens, recessions have followed in 9 out of the last 11 cases, going back to the 1950s. In fact, the monetary environment has taken a turn for the worse and rising interest rates is one reason why.
Note, for instance, the housing sector has slowed down this year. In large part, that’s thanks to higher interest rates. The same is true of the global economy. Even though it’s still firm, that growth has been somewhat sluggish since last year.
In Japan’s case, their economic growth actually shrank in the first quarter for the first time in nine quarters. This broke the longest run of growth for Japan in decades, which was a big disappointment.
Could Japan be leading the way for the rest of the world? Let’s hope not, but since countries generally tend to move together it’s something to keep an eye on.
Higher rates in the U.S. are hurting some of the emerging markets, but the rest of the world has kept their interest rates at historically low levels.
For now, however, the U.S. economy is looking good. Unemployment is at a 17 year low. Consumer confidence is at an 18 year high. The index of Leading Economic Indicators is also hitting new highs and this is good news.
But at the same time, a recent Fed survey and a United Way Report tell a different story. For example, 40% of U.S. adults do not have enough savings to cover a $400 emergency expense. In addition, 43% of households can’t afford the basics to live. So the outlook is actually very mixed.
Experts put the world’s total monetary base at about $24 trillion. As you know, it’s been growing a lot since the financial crisis of 2008; the world simply created money at double-digit rates year after year.
This money has kept the economy going and the stock market surging higher. And we believe it’s finally going to drive inflation higher too.
But with the economic environment now tightening up, these same monetary experts expect liquidity growth of only 3% over the next year. If this proves to be true, it won’t be enough to keep the economy or the financial markets sailing along.
Corporate debt is now at a level that has not ended well in past cycles. The corporate debt/GDP ratio could still go higher, but not by much. Whenever it falls, lenders will want to sell, but it’ll be hard to find buyers. This usually coincides with a recession.
Where does this leave us? That’s the big question...and the outcome is not yet as clear as we’d like to see it. That’s why we continue to recommend keeping a large position in cash for the time being. The bull market in stocks is already the second longest in history. So while it could still go higher, it’s nearing maturity and warrants some caution.
As far as strategy, we believe we’re at a point where a lot now depends on your age. If you’re a baby boomer, or an older investor, you’ll want to be more conservative because if the market turns down, you don’t have time to ride through a bear market or a steep downward correction, which could perhaps take years until you break even.
But if you’re a younger investor, then it’s okay to have a larger stock position, knowing this upmove may not last much longer. And if you do get stuck in a downmove, you have time to ride it through. That’s the way we see it and we feel this is a good strategy under the circumstances.
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