Experiential Wealth, Inc.
Experiential Wealth, Inc.
Experiential Wealth, Inc.


Quarterly Market Commentary – 2018 Q3

Oct 2, 2018 | Individuals, Institutions, Plan Sponsors, Quarterly Commentary

• The American economy is on fire, and there is no sign of retreat. We expect the third and fourth quarter to continue the above trend growth, and the U.S. will end 2018 closer to 3.5% real GDP than years of 2% growth. A meaningful slowdown is not anticipated until mid or late 2019, thanks to the deficit fueled animal spirit.

• The labor economy continues to be the bright spot. With new jobs creation remaining robust and quit rate on the rise, job prospect has not been this good for decades. There are more jobs opening than there are unemployed. The base case suggests that sooner or later, real wages will rise along with productivity.

• Chairman Powell laments that the neutral unemployment rate, the neutral inflation rate, and, thus, the neutral interest rate is unobservable. In fact, it is not at all certain which historical neutral rates the FMOC should refer to in setting today’s r*. By definition, all data are backward looking and FOMC’s role is to look forward. With uncertainty, Chairman Powell affirms that monetary policy should be applied moderately. This means a slow and steady (well broadcast) normalization process. The FOMC is expected to hike rates once more in December, and we expect two more next year. FOMC is mindful of rate hikes could invert the yield curve, thus placing constraints on the number of hikes in 2019.

• Chairman Powell is sensitive to not reacting to inflation concerns too early thereby cooling a good economy or acting too late and overheat the economy.

• The core PCE is now at 2%. From all indicators (market and survey-based), inflation remains in check and the long-term inflation expectation remains close to FOMC’s 2% target. With continuing US economic strength, the USD should remain strong which checks inflation. In the longer-run we are biased towards higher inflation.

• Trump’s trade policies may not have short-term negative impacts domestically, but, these policies, if sustained, could drive global growth slower and further exacerbate populism, tribalism, nationalism and deglobalization. The deck of cards is being reshuffled, and, if sustained, its impact remains uncertain to all parties.

• The U.S. economy is expected to grow at an above trend rate in 2018 and possibly 2019 (divergence), but as the rest of the world’s economy is showing signs of slowing and the effects of the fiscal stimulus runs their course, it is inevitable that we will slow as well (more synchronized.) We are not predicting a recession through 2019.

• With the world’s major central banks moving from accommodative to normalization policies in full force over the next two years, the global liquidity drain will add significant uncertainty to asset prices and risk taking.

Please click here to read the complete third quarter 2018 commentary.