Opening Statement from the December 2018 Intelligent Investor 

Opening Statement from the December 2018 Intelligent Investor 

Originally published on December 5, 2018 (pre-market release)

US Economy

Despite the recent deceleration in global economic growth, the US economy remains solid even though it has been unable to escape lower growth estimates for 2018 and 2019. Regardless, most major economic metrics remain favorable, ensuring continuation of uninterrupted growth in 2019. Even wage growth has picked up over the past year which has factored into the Fed’s forecast for future rate hikes. Although the US will enter 2019 with decelerating momentum, we expect corporate earnings growth, consumer sentiment, unemployment, inflation and interest rates to remain at very healthy levels.

Interest Rates

In early October Fed Chairman Powell made a vague statement regarding the future direction of short-term interest rates. His statement was interpreted by investors to imply many more rate hikes would be forthcoming over the next few years. In short, Powell stated that the current short-term rates were “probably a long way from the neutral rate.” Considering the Fed had been providing future rate hike forecasts linked to relevant economic data for close to two years, investors appear to have overemphasized the meaning of Powell’s nondescript statement. Accordingly, the stock market selloff in early October commenced as a result of investor misinterpretation of Powell’s statement.

When the Fed met recently, Powell altered his wording when commenting on interest rates. In short, he stated that short-term interest rates are currently “just below the neutral rate” despite the fact that rates had not been raised since he spoke in early October. Given that the Fed had previously discussed targeting rate hikes to a level slightly above the neutral rate, it seems as if investors interpreted Powell’s recent statement (in late November) to mean that he has lowered his rate hike projections. This pleased investors who responded by piling into the stock market last week.

Although Powell’s comments regarding where rates need to be were just as vague in November as they were in October, investors assumed his recent statement was an indication of a more dovish posture relative to his position in early October.

Did Powell’s subtle change in wording really reflect a change in rate hike estimates by the Fed? We...