Ten charts illustrate the macroeconomic trends most likely to shape Fed policy and investment performance in 2019 and beyond.
Scott Minerd, Chairman of Investments and Global CIO, and Guggenheim’s Macroeconomic and Investment Research Group analyze the 10 macroeconomic trends likely to shape monetary policy and investment performance as we head toward a recession in 2020.
Among our major themes:
- With economic growth set to slow and with financial conditions having tightened, the Federal Reserve will likely pause its rate hikes to start 2019 in order to stabilize markets.
- The combination of a Fed pause, decent earnings growth, and a modest recovery in price/earnings multiples will likely push the S&P 500 Index to new highs.
- A more dovish Fed will encourage more debt accumulation and allow excessive leverage to become more pronounced.
- Even as the Fed slows the pace of rate hikes, the labor continues to be strong. With job gains likely to further exceed labor force growth, unemployment is likely to fall even lower in 2019. We expect the Fed will raise rates twice in 2019 to try to cool the labor market.
- Given the strong relationship between the 10-year Treasury yield and the market pricing of the terminal fed funds rate, our forecast of two Fed rate hikes in 2019 suggests the 10-year Treasury yield will rebound to 3.15 percent.
- Business capital expenditures and consumption of homes, autos, and appliances will all feel the effects of rising rates in 2019. We see a broad-based slowdown in real GDP growth to below 2 percent year over year by the fourth quarter of 2019.
- Our recession model is signaling relatively low recession risk in the next 12 months, however we continue to expect a recession will begin in 2020, as a historically tight labor market forces further tightening by the Fed, pushing the overleveraged corporate sector into a downturn.
- With a recession likely to begin in 2020, we expect that spreads will be wider by the end of 2019. The most pronounced widening would occur in the high-yield sector.
- Given significantly higher borrowing costs, a seizing up in the flow of credit to leveraged borrowers, and a likely tightening of bank lending standards, we expect the high-yield default rate to climb in 2019.
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