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.
Important Notices and Disclosures
Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. This material is intended to inform you of services available through Guggenheim Investments’ affiliate businesses.
This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.
This material contains opinions of the author or speaker, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice.
Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.
Forward Looking Statements. This discussion material contains forward-looking statements, which give current expectations of market activities and market performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility.