Economic Update January 2019

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

• Federal Reserve disrupts markets
• Recession fears overblown
• Australian data mixed

The Big Picture

If they’d blown the final whistle at three-quarter time for 2018, we would have been looking back on an impressive year for both domestic and foreign equities. Instead we have to work out what really happened in this last quarter.

The consensus opinion, with which concur, is that the Chairman of the US Federal Reserve (the “Fed”), Jay Powell, started the sell-off with his comments that rate hikes had a long way to go. This was out of line with market expectations.

Trump and Powell have been jousting and we are the ones that got the raw deal. Economic fundamentals have hardly changed. While most agree what started the October rout, there are two camps of opinion concerning the future. One group is fearful that the Fed will push up interest rates too far and cause a recession in the US with consequences for the world.

We are in the other group. We believe that there will be at most one hike in 2019 (and not the two they flagged) and the Fed might even start to ease towards the end of 2019. They are charged with maintaining a stable economy and the wolves will be at their door if they fail.

Towards the end of 2018, there were a few stellar days up on Wall Street and quite a few down. Fund managers and others tend to ‘square’ their books at the end of the year – also managing capital gains and losses for tax planning. Until we are a few weeks into January, and reporting season in the US has started, we will not have a clear picture of what might follow.

We strongly believe – like many others – that both the ASX 200 and the S&P 500 are undervalued – by as much as 5% – 15%. With consensus brokers still predicting above average earnings growth, 2019 should look good.

It would be imprudent not to add a caveat. If companies reporting in the US materially downgrade their expectations in January, then we must follow suit. But, whichever way these predictions point, we do not see a recession in the US in 2019 at least. The bull run is far from finished. As they used to say in the old Western movies, “it’s only a flesh wound” best describes quarter 4 (“Q4”) of 2018.

There have been many other complex forces affecting short-term movements in markets. Oil prices took a battering in December – about 10% down (or 40% on the year) as OPEC and others tried to negotiate price stability. Iron ore prices were flat on the year but up 10% in December.To continue reading please visit www.infocus.com.au/news/economic-update-january-2019.