Trump, Higher Rates, U.S. Stocks

Yesterday U.S. President Trump told the press that he thinks that the U.S. Federal Reserve is raising rates too fast. He may be right.

On Monday, the International Monetary Fund (IMF) lowered its outlook for the global economy in its World Economic Outlook: 

Note the expectations for global growth in Advanced Economies (red line) as it declines beyond 2018. 

According to the IMF: "Global growth is forecast at 3.7% for 2018-19, 0.2% point below the April 2018 WEO projection, and is set to soften over the medium term. Global financial conditions are expected to tighten as monetary policy normalizes; the trade measures implemented since April will weigh on activity in 2019 and beyond; US fiscal policy will subtract momentum starting in 2020; and China will slow, reflecting weaker credit growth and rising trade barriers."

Financial conditions are expected to tighten as monetary policy normalizes: that means higher interest rates. The ones that Trump is not happy about.

Higher interest rates will draw liquidity out of the financial system and much of the stimulus that has driven U.S. stock prices higher over the past several years will no longer be there. In order to raise liquidity, institutions both public and private will need to sell assets. Likely they will start by selling the most expensive assets that they own. Those may happen to be U.S. stocks.

President Trump has frequently used the U.S. stock market as the gauge for his policy success, so he obviously does not want to see the U.S. stock market fall, as that would, in his way of thinking, paint his policies in a bad light.

As we have said (ad nauseum) this (higher interest rates and monetary policy tightening) is very typical of the late stages of economic expansion and usually at about this time, the U.S. Federal Reserve pushes a little too hard on the proverbial "brakes". This may be what president Trump is referring too. 

They pushed a little too hard in 2007, before that in 2000, 1989 and 1980. In fact every recession begins with the Fed raising rates.

The IMF forecast is taking this into consideration as well and that the recent bump (from tax reform) in U.S. fiscal stimulus will come to its end.

Time to make sure that your portfolio is prepared to withstand what the post-expansion phase of the economic cycle may have in store. High Rock Private Client portfolios have been prepared.

"By failing to prepare, you are preparing to fail" - Benjamin Franklin