Never mind the alarm bell sounded by one of Wall Street’s most accurate recession indicators, Scott Minerd of Guggenheim Partners says the Federal Reserve will revert to its old hawkish ways before the end of 2019.
“The rate declines are starting to feed back into the real economy and ultimately, the economy is going to reaccelerate and that’s going to continue to drive job growth, which will eventually spill into third or fourth quarter [economic growth],” he told MarketWatch during a phone interview on Friday.
“For that reason, the Fed will find itself raising rates before the end of the year,” he said.
That view may strike some as contrarian, given that projections by Fed members last Wednesday appeared to suggest no further interest rates are in the cards for the remainder of 2019, as the central bank downgraded its forecast for economic growth to 2.1% from 2.3% for this year. In fact, fed-funds futures rates are suggesting that investors are pricing in a roughly 40% chance of a rate cut in 2019, according to CME Group data.
On Friday, a global bond rally in the wake of weak eurozone economic data pulled down yields. The 10-year Treasury note yield TMUBMUSD10Y, -0.62% remains at 2.42%, falling below the three-month T-bill yield at 2.458%, as of early Monday. Normally, shorter-dated Treasurys offer lower yields than their longer-dated counterparts, with an inversion tending to signal a dim view of the economy held by investors.
The 3-month/10-year inversion is the most reliable yield-curve signal of future recession, according to researchers at the San Francisco Fed, preceding each of the past seven recessions, including the 2007-2009 contraction.
The yield curve’s inversion has rattled stock-market investors. All three benchmarks suffered their biggest one-day drop since Jan. 3 on Friday, with the Dow Jones Industrial Average DJIA, -0.29% tumbling 460.19 points, or 1.8%, to 25,502.32. The S&P 500 index SPX, -0.35% fell 1.9% to 2,800.71 and the Nasdaq Composite Index COMP, -0.59% declined 2.5% to 7,642.67. Stocks were headed lower Monday.
Minerd said the current yield-curve inversion resembles a flattening in 1998 during a crisis in Asian currencies, but wasn’t likely to derail the market’s mostly upward trend in 2019 nor economic expansion in the U.S. — at least in the near term.
“For stocks, we have more room to the upside as more green shoots appear in the economy,” Minerd said. “I think we’re going to get a rebound or a makeup for the slowdown we’ve had in the first quarter,” he said.
Against that backdrop, Minerd sees the stock market likely gaining another 10% before the end of 2019, putting overall annual gains near — but slightly below — those achieved in 2017, even if the market’s gains begin to fade in the second half of the year.
Minerd says a recession could still take hold in the middle of 2020, which is in keeping with his earlier prediction.
As for the bond buying, the Guggenheim investment manager says that government bonds are looking overbought, after the persistent rally that has helped to foster a yield-curve inversion.
“I think we’re in the endgame for the rally in bonds for the near term and we’ll get a selloff,” at some point, he said.
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