US Fed Sees Slower Growth

In about as bold a statement as you are ever likely to get from the Fed (because they will never suggest a recession is pending), yesterday (following their scheduled FOMC meeting) they announced downward revisions to their economic projections for 2019 and 2020.

Currently, per the chart above, Q1 GDP (based on data released so far this year) is expected to show extremely sluggish growth, not far from the zero line. So in as optimistic a tone as possible the press release stated that "growth of economic activity has slowed from its solid rate in the fourth quarter".

The Fed will always opt out of using language that might be detrimental to the confidence of consumers and businesses because as they become less confident of the future, consumers will postpone spending plans and businesses will hold off on capital investment. If the central bank has a frightening message, this could inevitably become a tipping point.

The Bank of Canada is no different. 

Bond market participants are pretty seasoned at reading between the lines and the benchmark US government 10 year bond yield dropped by almost 10 basis points. The Canada 10 year yield dropped by about 6 basis points. Clearly, bond markets are anticipating slower growth, lower inflation and lower interest rates in the future.

Stock market participants may also be getting the message: after a failed attempt to make higher prices post Fed announcement, stocks closed lower on the day. As of this writing, they appear to be lower again in overseas trading this morning.

If you haven't had a chance to read Paul's blog from last week: "One of these Markets is Wrong", have a peek.

Our thesis is and has been (ad nauseam) that stocks are a very expensive proposition: with slower economic growth, earnings are expected to fall. Yesterday FedEx reported lower than expected earnings and forecast the same for the near-future. If FedEx is not a window on modern day consumer activity, I am not sure what is. The consumer is about 2/3 of the US economy.

And stock prices (light blue line) are not reflecting this:

Value lies somewhere below the  dark blue line (as we saw in December).

As value investors at High Rock, we are not interested in being fully invested in our global equity model. While we did do some buying in December, we have recently been selling into the rally (didn't quite catch the highs, but close enough). We shall buy again when a slowing economy takes hold and offers up more value.

Until then we can enjoy the fact that we have exposure to alternative assets (high yield bonds and one of the top HY managers in the country in Paul) that pay us well (interest income) to hold them while we wait.

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