A significant drop in the markets would slow the Fed in 2019

After a week of strongly negative returns on the US stock markets that combine a "black" October month, the question is whether the Fed will continue its trend towards normalizing the interest rate or, the moment come, will take a break, especially during 2019.

In periods of sharp market decline, the Treasury bond yield curve tends to adjust to demand to protect against increased risk aversion.

This market adjustment during the month of October, such as the Dow -6.7%, the S & P -8.76% and the Nasdaq of 10.9%, may be the prelude to a period of temporal correction, which implies in the first place a possible time range from nine to 14 months fully encompassing 2019. So we should not expect big things in the US capital market as a basis for annual performance . This will imply that we will see additional losses in trade between 10 and 20% between 2018 and 2019.

We believe that the first cause of these adjustments is due to the Fed's interest rate normalization process: the growth potential of the financial markets is still compared in the investment strategy of the portfolios. the risk-free rate or a representative rate.

In the case of scholarships, we compare the annual performance of each of them. the 10-year bonus. With the Dow Jones, for example, when interest rates adjusted sharply after the subprime crisis, the investor was willing to pay up to 16 times the assets at risk. However, as interest rates have risen, the investor tends to pay less. In 2017, he came to pay almost 13 times and currently pays less than once.

Juan Ángel Espinosa

In the case of entry into negative territory, this indicator, as it was the case from 2000 to 2003, from 2007 to 2009 or between 2015 and 2016, has affected consumer confidence and the growth of the economy. ;economy. This led to declining interest rates and the Fed had to change its strategy.

At present, several important events can affect the growth of the economy, such as interest rate increase forecasts, trade tensions with China, the slowdown in China, Italy, the Brexit, the conformation of the new United States Congress, other geopolitical factors. .
Thus, we believe that in 2019, it is very likely that the Fed will let down its watch and leave its rate movements unchanged during one or more quarters and that it will not be able to systematically reach its neutral zone between 3.25 and 3.50% per annum, whereas today it stands at 2.25% and will close the year 2018 at 2.50% per annum.