Ed Yardeni turns more cautious

by Laura Ehrenberg-Chesler on November 14, 2018

in Commodities,Earnings,Economic Indicators,equity market,Fed policy,interest rates,politics

Ed Yardeni has been bullish for the better part of the most recent bull market. He recently turned more cautious due to the Federal Reserve raising rates, a slowing global economy, the China trade impasse, and domestic politics. From his research today:

“On balance, Trump’s policies have boosted economic growth and further tightened the labor market. As a result, Fed officials—who did a good job of prepping the financial markets for a gradual course of hikes in the federal funds rate, aiming for a “neutral” 3.00% level by the end of next year—have recently been chattering about even higher rates, i.e., turning restrictive. Consequently, the trade-weighted dollar has soared. The combination of higher US interest rates and a stronger dollar is suppressing US inflation while depressing commodity prices as well as the global economy, particularly emerging market economies. The situation is akin to driving a car with the left foot bearing down on the accelerator while the right foot taps the brakes, as we’ve noted frequently this year.

The outlook for 2019 is most likely for more volatility. That’s assuming that tensions between the US and China continue to mount, as discussed below. On the bullish side, the latest FOMC statement did hint faintly that a pause in the Fed’s quarterly rate hiking might be possible next year. Meanwhile, the global economy continues to weaken. In any event, the growth rates of both S&P 500 revenues and earnings will certainly be slower in 2019 than this year.

It’s widely believed that the stock market likes gridlock, which now is assured for the next two years given the mid-term election results. However, the country has been experiencing an escalating uncivil war between the Left and the Right. It will only get worse, as explained in the cover story of the latest Bloomberg BusinessWeek titled “Republicans Weaponized the House. Now, Democrats Will Use It Against Trump.” That may contribute to more stock market volatility next year.

Joe and I curbed our enthusiasm for the stock market’s upside in the 10/30 Morning Briefing. We lowered our outlook for earnings growth over the next two years, as we reviewed yesterday. At the end of last month, we also reduced our target for the S&P 500 from 3100 to 2900 for the end of this year and from 3500 to 3100 by year-end next year. We aren’t bearish because we expect that the US economy will continue to grow over the next two years. Furthermore, we remain open to the possibility that productivity will make a long-awaited comeback.”
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