Guggenheim Investments released a new report entitled “10 Macro Themes to Watch in 2019,” which suggests that a rate pause could help push the S&P 500 to new highs this year.
Without the fear of rising rates, investors can refocus on company fundamentals. Much of the market declines in 2018 were also heavily fueled by news, such as trade wars.
“With a Fed pause helping to alleviate monetary policy concerns, the market will likely turn its focus to fundamentals,” the report noted.
With banks kicking off fourth-quarter earnings this week, investors can also refocus on locating value as opposed to the growth-fueled investments that drove the extended bull run. Additionally, analysts at Guggenheim are expecting earnings to rise by 9 percent in 2019, which is less than the 27 percent in 2018, but still above the historical average.
“The combination of decent earnings growth and a modest recovery in price/earnings multiples will likely push the S&P 500 index to new highs,” the report said.
The S&P 500 went above 2,900 just prior to the volatility-laden months towards the end of 2018. It’s currently trading just over 100 points away from its 200-day moving average.
Fed Patience is Key
A rate pause will certainly rely on a more patient Fed. After four definitive rate hikes in 2018, the Fed is now taking a wait-and-see approach for 2019.
“We begin the year as close to our assigned objectives as we have in a very long time. In these circumstances, I believe patience is a virtue and is one we can today afford,” said Fed Vice Chairman Richard Clarida in prepared remarks for the Money Marketeers of New York University.
With Wall Street crying foul the past few months on the latest market declines, especially after a difficult December, the Fed is changing their tune in unison. Furthermore, with fears of a global economic slowdown despite a robust labor market domestically, the Fed is keen on exercising patience.
“If these crosswinds are sustained, appropriate forward-looking monetary policy should respond to keep the economy as close as possible to our dual-mandate objectives of maximum employment and price stability,” Clarida said.
Clarida’s comments mirror that of Fed Chair Jerome Powell who recently preached patience and adaptability with respect to interest rate policy.
“As always, there is no preset path for policy,” Powell said. “And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”
Powell’s latest comments came after U.S. equities finished their worst year in over a decade. The Dow fell 5.6 percent, while the S&P 500 lost 6.2 percent and the Nasdaq Composite fell 4 percent.
Furthermore, December alone resulted in the Dow falling 8.7 percent and the S&P 500 losing 9 percent, making it the worst December since 1931. However, it appears the Fed is finally paying closer attention to the pulse of the markets.
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