The U.S. economy could well be on the cusp of a Fed-induced hangover as the central bank looks on track to continue its normalization program.
The issue of the Fed raising rates is back in the public’s attention following President Donald Trump’s comments during an interview with Reuters this week in which he claimed he was “not thrilled” by the Federal Reserve chairman’s decision.
Trump went on to say he would continue to criticize the policymakers if they continued to increase short-term rates.
It’s considered rare for presidents to slate the Fed, as its independence is considered essential for economic stability.
That said, this latest attack by Trump will probably be disregarded by the central bank’s policymakers.
It’s my view that the Fed won’t deviate from its plans to raise interest rates following Trump’s comments, with the hike likely taking place next month in an attempt to cool down the economy.
Indeed, as it stands, the U.S. economy is growing at an annualized rate of approximately 4 per cent a year.
However, considering the robust growth will probably speed up the interest rate rises, the U.S. economy could feel the effects of a Fed-induced hangover in 2019 as it is gradually urged to cool.
Nevertheless, to my mind, apprehensions in the market as regards an all-out recession next year are misguided.
Looking at domestic economic growth, it is easily outperforming growth witnessed this year in Europe or Japan, and with potential further rises for the dollar on Fed rate hikes, an overweight stance in U.S. stocks is warranted at present.
S&P 500 stocks have had solid year-on-year corporate earnings and revenue growth over two quarters. However, the index didn’t manage to surpass the record high from the end of January. This shows that valuations have dropped, allaying worries of Wall Street being too high-priced.
We know that the U.S. stock market is varied, and I’m not solely referring to the FAANGs. Of course, technology does constitute a quarter of the index, but the category also consists of firms such as chip manufacturers and social media operators. Whereas in the meantime, investors can further diversify their portfolios with an extensive market of mid and small-cap stocks.
Only a few weeks previously, the S&P 500 total return index — which incorporates dividends re-invested — reached a new high, highlighting the power of re-investing dividend income.
As financial history has taught us, in order for long-term investors to enjoy the highest returns, re-investing investment income within a portfolio is a crucial aspect.
I’m certain that the Fed will continue its current path of hiking interest rates, regardless of the president’s critique.
However, Trump’s critical remarks are somewhat strange bearing in mind it is his cuts and reforms that may be a primary motive for the growth spurt leading to the central bank policymakers needing to tighten monetary policy.
Nigel Green is founder and CEO of deVere Group. One of the world’s largest independent financial advisory organizations, de Vere does business in 100 countries and has more than $12 billion under advisement.
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