The first quarter of 2019 has been an outstanding one from an investment perspective, particularly the depth and breadth of the returns across financial markets.
While US-China trade negotiations continued throughout the quarter, markets were optimistic they would soon be finalised, with a strong outcome for the US.
Indeed, the US economy appears to be in a ‘sweet spot’ and, given its size and influence in global economic terms, this should underpin global market performance for some time yet.
US Unemployment is at a record low of 3.6%, consumer spending is strong, yet inflation is benign.
Corporate earnings are proving resilient, with US companies recording an Earnings Per Share growth rate of 16.2% for the 2018 calendar year.
What is likely to be a key driver of US equity markets throughout the majority of the remainder of the year, is not what IS happening, but what is NOT happening.
And that is, US benchmark interest rates will NOT be rising.
In the absence of inflationary pressure, the US Federal Reserve has no reason to raise interest rates, which is a monumental backflip from their stated intentions of late 2018.
Towards the end of last year, the US Federal Reserve predicted they would be raising benchmark interest rates throughout 2019, which spooked the markets and sent equity prices down significantly.
More than coincidentally, this backflip has been the catalyst for the March quarter recovery.
So, how can we be so confident they will not raise rates throughout the remainder of 2019?
Put simply, the US Federal Reserve chairman’s credibility is on the line.
He cannot do another back flip on interest rates any time soon. His reputation is already tarnished somewhat from his change in stance from the end of 2018. Another back flip would spell a career disaster and could cost him his job.
US equity markets should therefore be underwritten by “lower for longer” interest rates throughout 2019.
Unfortunately, President Trump’s twitter account will get in the way from time to time, as we are seeing now.
While his approach is certainly not conventional, the runs are on the board as far as the US economy is concerned, and no doubt he is well aware the next Presidential election campaign will be starting sooner rather than later.
Should you wish to discuss this or any other investment related matter, please contact your Investment Services Team on (02) 4928 8500.
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