Rate Hike Cycle To End In 2020?

A big question investors are trying to wrap their heads around is why the headlines suddenly matter to equities in 2018. There were geopolitical concerns in 2017, yet stocks were sanguine. This year, negative headlines seem to impact stocks more. There’s no doubt some of the uncertainties could affect stocks in the intermediate term. In that case investors come up with an expected return which is the various levels of impacts multiplied by the probability of them occurring. The point we’re getting at is the reason stocks have responded to negative headlines is because there’s a backdrop of global growth deceleration.

There were fears of a trade war heading into 2017, yet trade and growth beat estimates. This year growth is expected to be high because of the tax cuts and spending plan while there could be a negative impact from tariffs. It looks like the initial economic estimates are being missed in Q1. That’s because the underlying cyclical momentum of the economy, which is now negative, is unheralded. At the same time, the speed of the phase changes (the economy has gone from accelerating to decelerating) is misunderstood as well. By the time the economists were in sync with the prospect of an upturn, it ended. The problem with following the narrative is it is affected by the stock market. If you rely on the narrative, you have a delayed reaction to market movements which doesn’t work. Remember, markets are forward pricing mechanisms, that means once you wake up to the realities of what the market has shown already it might be a good idea to question the narrative.

European Economic Weakness

The Europe 600 STOXX index was down about 2% year to date as of April 17th which means it underperformed the S&P 500 by about 3%. The advanced Q1 GDP reports will be unveiled in the next couple of weeks. They will confirm what the market told investors when it declined earlier this year. In the next couple months, we’ll be looking for either a rebound in growth or a further deceleration. Europe’s growth hasn’t been as steady as growth in the US, since Europe experienced a recession in late 2011. The chart below shows the historical quarter over quarter real GDP growth in the grey bars. The red and blue lines are the most interesting because they examine future performance, specifically how quickly Q1 GDP growth will be based on hard and soft data.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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