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Barry B. Bannister, CFA | (443) 224-1317 | [email protected] R. Carroll | (443) 224-1311 | [email protected] Equity Trading Desk | (800) 424-8870
December 11, 2018
Market Strategy
MARKET COMMENTARY/STRATEGY
"Santa Claus (Rally)"? At least we hear some bells; S&P 500 YE target is 2,800 SummaryUp front, it is important to note that if the Fed does not signal a 'pause' at their Dec-19 meeting we would expect stocks to fall quitesharply (an under-statement), negating our S&P 500 target. The S&P 500 has successfully tested -10% corrections four times in2018 (each from a recent high), with an intact up-trend to our unchanged 2,800 year-end target price (tied for 2nd lowest amongStrategists). We believe Dec-2018 will be the last Fed rate hike of this cycle, and our emerging view is that the Fed’s next movemay be a rate cut by 2020 as fiscal becomes a drag and recession concerns loom. We see 2019 as a transition year for the S&P500, stabilizing around 2,800 which is a P/E by year-end 2019 of ~16.7x TTM EPS of $168. The Street consensus 2019 EPS of $174is expected to decline to our view.
Key Points
S&P 500 2,639 (intra-day 12/11/18)
S&P 500 successfully tests -10% 4x in 2018, with intact up-trend to our 2,800 year-end target (IF Fed pauses)
• S&P 500 up-trend is intact after four -10% corrections from the preceding high, target 2,800 year-end (p.3)
• Part (1) of the story for stocks in 2018 was the tax cut, which strongly lifted S&P 500 EPS views (p.4)
• Part (2) of the story for stocks in 2018 was normalizing real rates, which compressed the P/E ratio (p.5)
• If the Fed does not signal a 'pause' at their Dec-19 meeting, we would expect stocks to fall quite sharply
We believe Dec-2018 is the last Fed rate hike of this cycle (and the Fed’s next move is a cut by 2020)
• We believe Dec-2018 is the last Fed rate hike of this cycle (and the Fed’s next move is a cut by 2020) (p.7)
• What the Fed missed: Even at fed funds below neutral, we believe the Fed already tightened “too much” (p.8)
• Although the Fed says “neutral” is ambiguous, equities see it clearly, so we’ve been sounding the alarm (p.9)
• Politics are local, economies are global, and low foreign yields cap U.S. yields while stopping the Fed (p.10)
2019: P/E ratio stabilizes ~16.7x (trailing) as Street EPS fall to our $168 view, keeping S&P 500 around 2,800
• We don't see a 2019 U.S. recession (that's 2020), but do see slower nominal economic growth in 2019 (p.12)
• We see 2019 S&P 500 EPS consensus falling to our $168 view (Street $174), limiting S&P 500 upside (p.13)
• Our 2,800 S&P 500 target in 2018 carries over to 2019 as EPS slow (still rising y/y), and the P/E flattens (p.14)
• We believe growth abroad slows in 2019, and we will look more to the dollar (than yields) to measure stress (p.15)
All relevant disclosures and certifications appear on pages 16 - 17 of this report.
Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware thatthe firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report asonly a single factor in making their investment decision.
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
In our view:
S&P 500 successfully tested -10% 4x in 2018, with an
up-trend that is intact for our 2,800 year-end target,
providing Fed pauses Dec-19 (if not, market drops)
Market Commentary/Strategy
December 11, 2018
2
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
S&P 500 successfully tested -10% 4x in 2018, with an up-trend that is intact for our 2,800 year-end target.
The S&P 500 has been in a wide up-trend, correcting -10% four times from its most recent high as strong
EPS were offset by a lower P/E, the latter caused by rate normalization. Our 2,800 year-end S&P 500
target has been the 2nd lowest on the Street(1), but we think it is achievable (IF the Fed pauses Dec-19th).
Source: Bloomberg data.
(1) SPXSFRCS on Bloomberg, go to DES and click {TNI TABLE STRATEGY <go>}.
From
2,931 on
9/20/18
From
2,873 on
1/26/18
-10.16%
S&P 500 in 2018 Trading in a Range-Bound Up-Trend
-10.13%
-10.17% -10.16%
Market Commentary/Strategy
December 11, 2018
3
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
Part (1) of the story for stocks in 2018 was the tax cut, which strongly lifted S&P 500 EPS views.
It is normal for Street consensus to decline even in a good year for the economy, with the
progression of estimates for calendar 2012 to 2019E shown below. The bump in 2018 was the
Tax Cut and Jobs Act, which lowered corporate tax rates.
[Subscriber] Copyright 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at
www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
2018 EPS:
Tax Cut &
Jobs Act
Market Commentary/Strategy
December 11, 2018
4
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
-5.0%
-4.5%
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-1.0%
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1.0%
1.5%
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5.5%
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7.5%
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10x
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003
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Dec-2
019
E
Re
al
Co
re-P
CE
-Ad
jus
ted
Fe
d R
un
ds
Ra
te
P/E
on
Tra
ilin
g 1
2-M
on
th O
pe
rati
ng
EP
S
S&P 500 Trailing 12-Month Price-to-Earnings Ratio on Operating EPS vs. Real (Core-PCE Adjusted) Effective Fed Funds Rate
(For the 0% fed funds period of 2008 to 2015, we use the Atlanta Fed Shadow Fed Funds Rate(1) minus Core PCE Inflation)
Late-90s
Tech Bubble
Part (2) of the story for stocks in 2018 was normalizing real interest rates, which compressed the P/E ratio.
Despite S&P 500 EPS growth ~25% y/y in 2018E, the P/E (blue line) has declined a similar amount, caused
by Fed tightening as the real fed funds, or fed funds minus Core PCE inflation, rose (green line). If the Fed
pauses rates we think only major EPS weakness would cause an actual bear market, and since we only
see a slowing that profit recession is not our view. As discussed later, our EPS view is below consensus.
Source: Bloomberg data, San Francisco Fed, Stifel format and estimates.
(1) Wu-Xia / Atlanta Fed Shadow Fed Funds (here) shows what the fed funds rate would have been had 0% not been the floor during QE 1/2/3 when fed funds was at the zero-bound 2009-15.
The S&P 500 P/E (blue line) has
fallen in 2018 as the real fed funds
(Fed funds minus Core PCE, the
green line) has increased
Market Commentary/Strategy
December 11, 2018
5
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
In our view:
We believe Dec-2018 is the last Fed rate hike of this
cycle (and the Fed’s next move is a cut by 2020)
Market Commentary/Strategy
December 11, 2018
6
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
-4%
-3%
-2%
-1%
0%
1%
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6%
7%
8%
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12%
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Fed Funds Effective Rate Fed Funds Shadow Rate (2009-2015)
Fed Funds Actual Rate Dec-1985 to present (Black) with Atlanta Fed Shadow(1) Funds Rate (--- blue) in 2009-15
We believe Dec-2018 will be the last Fed rate increase of this cycle (which began May 2014 at the Shadow Fed Funds low of -3%)
6%
10%
3%*
7%**
* 2.92% Dec-92 ** 6.54% Jul-00
1%
5%
(3)%
We believe Dec-2018 will
be the last Fed rate
increase of this cycle
We believe Dec-2018 is the last Fed rate hike of this cycle (and the Fed’s next move is a cut by 2020).
The fed funds (black line) has been in a rate cycle since May 2014 when the Atlanta Fed Shadow Fed
Funds (---- blue line) bottomed at -3%. Our view has been that rising market stress and sluggish growth
with low inflation should lead to a Fed “pause” that ultimately turns into “the end” for this rate cycle.
Source: Bloomberg data, Federal Reserve, Stifel format.
(1) Wu-Xia / Atlanta Fed Shadow Fed Funds (here) shows what the fed funds rate would have been had 0% not been the floor during QE 1/2/3 when fed funds was at the zero-bound 2009-15.
R R R
Market Commentary/Strategy
December 11, 2018
7
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
Dec-8
2
Dec-8
3
Dec-8
4
Dec-8
5
Dec-8
6
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Dec-8
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Dec-8
9
Dec-9
0
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6
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Dec-9
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9
Dec-0
0
Dec-0
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Dec-0
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4
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Dec-0
6
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c-0
7
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
Dec-1
4
Dec-1
5
Dec-1
6
De
c-1
7
Dec-1
8
Effective Fed Funds Rate vs. Neutral* Fed Funds RateWith Stifel Projections (Dotted)
* Neutral fed funds rate per Laubach & Williams (SF Fed) with Stifel projections to Dec-2019E. We show nominal neutral rates (r* plus core-PCE), using median Fed estimates for inflation through Dec-2019E.
Fed funds does not have
to exceed neutral to cause
stress this cycle
S&L and Junk
Bond Crises,
Brady Bonds
Tech Stock
Bubble
Bursts Global
Financial
Crisis
Continental
Bank fails
Mexican
Peso
Crisis
EM Financial
Crisis and
LTCM failure
Source: Bloomberg data, Stifel format and estimates.
(1) We continually update the historical neutral rate from Laubach & Williams (SF Fed, link here) with r code using the Fed’s own projections through 2018E (most recent release Sep-2018) for GDP, Core-PCE,
and median fed funds. Note that the “neutral” nominal rate (red line above) is projected Core-PCE inflation plus the neutral real rate (called r*) which is the rate at which GDP is on-trend with stable inflation.
What the Fed missed: Even at fed funds below neutral, we believe the Fed already tightened “too much.”
The fed funds (black line) has been below neutral (red line(1)) for a decade, driving risk-taking. But crises
(as noted on the chart) occur at progressively lower spreads to neutral rates. Our view has been that
rising equity market stress factors cap S&P 500 upside in 2018 as rates only approach neutral levels.
Market Commentary/Strategy
December 11, 2018
8
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
(-6.0%)
(-5.0%)
(-4.0%)
(-3.0%)
(-2.0%)
(-1.0%)
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2.0%
3.0%
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8
Fed funds rate above/(below) the neutral rate(with estimates to Dec-2018)
Jun-1998
Jun-2000
Jun-2007
Jun-1998
Jun-2000
Jun-2007
400
800
1,600
3,200
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S&P 500 Index (Shown Semi-Log)
Jun-1998
Jun-2000
Jun-2007
Sep-2018
Peaks in fed funds above the neutral
level (see left side chart) precede
bear markets of increasing severity
Source: Bloomberg data, Stifel format and estimates.
(1) The neutral rate is from Laubach & Williams (SF Fed, link here), replicated to project r* (the neutral real rate) through 2018E based on median Fed economic projections (as of Sep-2018). Note that
the “neutral” nominal rate is projected Core-PCE inflation plus the neutral real rate (called r*) which is the rate at which GDP is on-trend with stable inflation.
With the Sep-26, 2018
rate increase the Fed
already crossed a bear
market trigger point
4 ½ year rate cycle: Interestingly, May
2014 was also the Shadow Fed Funds low
Although the Fed says “neutral” is ambiguous, equities see it clearly, so we’ve been sounding the alarm.
A max-tolerable peak for fed funds vs. the neutral rate(1) (left chart) is associated with market tops (right
chart) since the savings-fueled global debt boom began in the 1990s. This Fed rate cycle actually began
4½ years ago in May-2014 (left chart). The down-trending lines at left may be due to the falling ability of
debt to generate GDP, which magnifies rate sensitivity. The increasingly large bear markets (right chart)
may reflect equity as the junior slice of capital, most susceptible to default risk of being “wiped out.”
-20%
-49%
-56%
Market Commentary/Strategy
December 11, 2018
9
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
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0
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8E
U.S. 10Y yield minusG10 (Ex-U.S.) GDP-weighted 10Y yield
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
U.S. 10-Yr. Treasury Yield andG10 Ex-U.S. 10-Yr. Yield (GDP-Weighted)*
* G10 (ex-U.S.) 10Y yield is Germany, Japan, UK, France, Italy, Canada, Benelux, Sweden and Switzerland. Note that the G10 (ex.-U.S.) 10-year yield is GDP-weighted.
Politics are local, economies are global, and low foreign yields cap U.S. yields while stopping the Fed.
Foreign central banks have shown no appetite for tightening, keeping foreign 10Y yields well below
(and capping) the U.S. 10Y (left chart). The Fed must pause or risk yield curve inversion/recession (gray
bars, left). We see the U.S. 10Y yield falling (right chart) as growth slows and the Fed pauses/stops.
Mind the gap:
U.S. 10Y yield
gap vs. foreign is
approaching a
level that
foreshadows a
recession
Source: Bloomberg data, Stifel estimates and format.
(1) Spillover from a deflationary shock due to poor growth abroad (strong dollar, tightening dollar liquidity) is a catalyst for a Fed pause, in our view, which lowers the U.S. real 10Y yield (USGGT10Y).
1.00%
1.25%
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
3.50%
3.75%
4.00%
4.25%
4.50%
4.75%
5.00%
5.25%
5.50%
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U.S. 10-Yr. Treasury YieldWith polynomial trend +/- 1.5σ
“Whatever it
takes” - Draghi Brexit
Tax cuts,
Trade Fed
QE3
Fed
QE1 Fed
QE2
Global
financial
crisis
-1.50σ
+1.50σ
We see the 10Y yield
falling (first was
breakeven inflation, now
real yield has topped(1))
R R R
R R R
Gap
Gap
Gap
Gap
Market Commentary/Strategy
December 11, 2018
10
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
In our view:
2019: P/E ratio stabilizes ~16.7x TTM EPS as the Street
EPS (of $174) falls to our $168 view for 2019, causing
the S&P 500 to remain around 2,800
Market Commentary/Strategy
December 11, 2018
11
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
Source: Bloomberg data, NBER Recession Dates, Stifel format.
(1) The Fed signaled rate hikes in mid-2014 and tapered QE3 while foreign central banks were easing, triggering a deflationary policy divergence. The Shadow Fed Funds rate also soared
mid-2014 to 1Q16, a de facto rate hike of 300bps. U.S. Industrial Production (oil capex, et al.) collapsed, the dollar soared 2H14 to 1Q16, and China was driven off its USD peg.
We do not see a 2019 recession (that's 2020), but do see a meaningful 2019 slowing of nominal U.S. growth.
The S&P 500 has been lifted by tax cuts and recovery from a de facto “recession” only three years ago. To
explain, the Fed’s ill-fated(1) 1st rate hike in Dec-2015 caused Industrial Production (IP) to fall to a level
commensurate with past recessions (left chart), and the only reason a recession was not declared was that IP
has steadily diminished within GDP. The broad economy was affected, as nominal GDP fell to recession levels
(right chart). Economic recovery began in 2016 when the Yellen Fed paused, and we see the Powell Fed now
backing away from the abyss, albeit too late to prevent both IP and Nominal GDP from slowing in 2019.
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
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11.0%
12.0%
13.0%
14.0%
15.0%
1Q
1977
1Q
1979
1Q
1981
1Q
1983
1Q
1985
1Q
1987
1Q
1989
1Q
1991
1Q
1993
1Q
1995
1Q
1997
1Q
1999
1Q
2001
1Q
2003
1Q
2005
1Q
2007
1Q
2009
1Q
2011
1Q
2013
1Q
2015
1Q
2017
1Q
2019
U.S. Nominal GDP Growth Y/Y% (SA) 1Q1978 to Present (With Stifel 2019 Estimates)
Grey areas denote recessions
Nominal GDP
recession
early 2016
Jul-80-6.2% Aug-82
-7.1%
Mar-91-3.5%
Nov-01-5.2%
Jun-09-15.3%
Dec-15-4.0%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Jan
-78
Ja
n-8
0
Ja
n-8
2
Jan
-84
Ja
n-8
6
Ja
n-8
8
Jan
-90
Ja
n-9
2
Ja
n-9
4
Jan
-96
Ja
n-9
8
Ja
n-0
0
Ja
n-0
2
Ja
n-0
4
Ja
n-0
6
Ja
n-0
8
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n-1
0
Ja
n-1
2
Ja
n-1
4
Ja
n-1
6
Ja
n-1
8
Ja
n-2
0
Industrial Production (IP) Y/Y% Change & Stifel 2019 Est. with NBER-declared U.S. Recessions (Shaded Bars)
R R R R R
Industrial
production
recession
end of 2015
Market Commentary/Strategy
December 11, 2018
12
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18% Dec-2
002
Dec-2
003
Dec-2
004
Dec-2
005
Dec-2
006
Dec-2
007
Dec-2
008
Dec-2
009
Dec-2
010
Dec-2
011
Dec-2
012
Dec-2
013
Dec-2
014
Dec-2
015
Dec-2
016
Dec-2
017
Dec-2
018E
Dec-2
019E
S&
P 5
00 E
PS
y/y
%
Y/Y
Do
llar
(IN
VE
RT
ED
Axis
)
Broad Dollar (Y/Y% INVERTED, LS) [Bloomberg USTWBROA] vs. S&P 500 Operating EPS (Y/Y%, RS)
Truncated
Stro
ng
Do
llar
We
ak
EP
S
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
De
c-2
00
2
De
c-2
00
3
De
c-2
00
4
De
c-2
00
5
De
c-2
00
6
De
c-2
00
7
De
c-2
00
8
De
c-2
00
9
De
c-2
01
0
De
c-2
01
1
De
c-2
01
2
De
c-2
01
3
De
c-2
01
4
De
c-2
01
5
De
c-2
01
6
De
c-2
01
7
De
c-2
01
8
De
c-2
01
9
S&
P 5
00 E
PS
y/y
%
U.S
. N
om
ina
lG
DP
Y/Y
% C
ha
ng
e
U.S. Nominal GDP Y/Y% (LS, With Stifel 2019 Estimates)vs. S&P 500 Operating EPS (Y/Y%, RS)
Truncated
We do see 2019 S&P 500 EPS consensus falling to our $168 view (Street is $174), limiting the S&P 500 rally.
EPS growth in 2018 has been supported by tax cuts, buybacks and a brief synchronization of global GDP
that assisted cyclical EPS. But the Broad U.S.$(1) has already strengthened enough to reduce 2019 EPS (left
chart), reinforced by slower Nominal GDP and the effects of weak commodities on EPS (right charts).
Source: Bloomberg data, S&P Dow Jones Data, Stifel format and estimates.
(1) The Broad Dollar consists of a 57% weight in EM currencies, so tightening global dollar liquidity and its effects on dollar-denominated debts abroad is a factor in broad dollar strength.
Right chart title should be same font as left and say:
(in this order:)
U.S. Durable Goods Orders Excl. Defense and Aircraft (RS)
vs. S&P 500 Operating EPS Growth with Street Consensus
(Y/Y%, RS)
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Dec-2
00
2
Dec-2
00
3
Dec-2
00
4
Dec-2
00
5
Dec-2
00
6
Dec-2
00
7
Dec-2
00
8
Dec-2
00
9
Dec-2
01
0
Dec-2
01
1
Dec-2
01
2
Dec-2
01
3
Dec-2
01
4
Dec-2
01
5
De
c-2
01
6
Dec-2
01
7
Dec-2
01
8
Dec-2
01
9
S&
P 5
00
EP
S y
/y%
CR
B R
IND
Co
mm
od
ity P
ric
es
Y/Y
% C
ha
ng
e
CRB RIND Commodity Price Index Y/Y% (LS)vs. S&P 500 Operating EPS (Y/Y%, RS)
Truncated
Market Commentary/Strategy
December 11, 2018
13
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
-6.0%
-5.5%
-5.0%
-4.5%
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
10x
11x
12x
13x
14x
15x
16x
17x
18x
19x
20x
21x
22x
23x
24x
25x
26x
27x
28x
29x
30x
De
c-1
99
1
De
c-1
99
2
De
c-1
99
3
De
c-1
99
4
De
c-1
99
5
De
c-1
99
6
De
c-1
99
7
De
c-1
99
8
De
c-1
99
9
De
c-2
00
0
De
c-2
00
1
De
c-2
00
2
De
c-2
00
3
De
c-2
00
4
De
c-2
00
5
De
c-2
00
6
De
c-2
00
7
De
c-2
00
8
De
c-2
00
9
De
c-2
01
0
De
c-2
01
1
De
c-2
01
2
De
c-2
01
3
De
c-2
01
4
De
c-2
01
5
De
c-2
01
6
De
c-2
01
7
De
c-2
01
8
De
c-2
01
9
Eff
ec
tiv
e F
ed
Fu
nd
s R
ate
min
us
Sa
n F
ran
cis
co
Fe
d N
eu
tra
l R
ate
S&
P 5
00
P/E
on
Tra
ilin
g 1
2-m
on
th O
pe
rati
ng
EP
S
S&P 500 Trailing 12-Month P/E Ratio on Operating EPS (LS) vs.Fed Funds Rate minus the Neutral Rate (RS)
(The Shadow Fed Funds Rate(2) is used for the period of 0% fed funds 2008-15, shown as a dashed - - - line)
The P/E (blue line) should level at
about 16.67x trailing 12-month EPS in
2019E, as fed funds minus the neutral
rate (red line) peaks this cycle at
about 25bps below neutral
Late-90s Tech
Bubble
Our 2,800 S&P 500 target in 2018 carries over to 2019 as EPS slow (still rising y/y), and the P/E settles flat.
We are below consensus with a $168 EPS view in 2019 (Street is $174). Even with the Fed pausing at
about 25bps below the neutral rate(1), the S&P 500 P/E associated with that level is 16.67x trailing 12-
month EPS of $168 by YE 2019E, worth ~2,800 for the index (P/E 16.67 x $168 = ~2,800) a year from now.
Source: Bloomberg data, San Francisco Fed, Stifel format and estimates.
(1) The neutral rate (Laubach & Williams, SF Fed, here) is the rate at which GDP is on-trend and inflation is on-target. We estimate the rate spread will be -.25% to -0.50% in 2019E.
(2) Wu-Xia / Atlanta Fed Shadow Fed Funds (here) shows what the fed funds rate would have been had 0% not been the floor during QE 1/2/3 when fed funds was at the zero-bound 2009-15.
Market Commentary/Strategy
December 11, 2018
14
Barry B. Bannister, CFA Stifel Equity Strategy [email protected]
We believe growth abroad slows in 2019, and we will look more to the dollar (than yields) to measure stress.
The ECB and BoJ now face deeply negative Shadow Policy Rates(1) (left charts), and risk strong currency
deflation if a Fed pause/stop leads to dollar weakness. Combined with China growth slowing (right chart),
which weakens European and Japanese exports, the result is that the dollar may be our best risk signal for
global growth in 2019. That is because dollar weakness works against Europe and Japan but on balance is
slightly positive for China, albeit only to help China muddle through credit problems and rebalancing.
48
49
50
51
52
53
54
55
56
57
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
Ja
n-1
0
Ja
n-1
1
Ja
n-1
2
Ja
n-1
3
Ja
n-1
4
Ja
n-1
5
Ja
n-1
6
Ja
n-1
7
Ja
n-1
8
Ja
n-1
9
All China Financing + Fiscal Spending, i.e., all Stimulus (LS) vs. China PMI for Manufacturing [CPMINDX Bloomberg] (RS)
China’s official
Manufacturing PMI
is likely to go
below 50.0 soon
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
1.55
1.60
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Shadow Policy Rates (LS) vs. Currencies EUR & JPY (RS)
EUR/USD (RS)
70
80
90
100
110
120
130-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Jan
-16
Jan
-17
Jan
-18
Jan
-19
Jan
-20
JPY/USD (Inverted, RS)
If the Fed pauses the ECB is trapped,
because if the ECB raises rates the
euro could soar due to a rising
Eurozone Shadow Rate
…same for BoJ and yen
-3% Euro
Shadow Rate
-8% Japan Shadow Rate
Source: Bloomberg data, Stifel format and estimates.
(1) ECB & BoJ Shadow Rates are described here.
Market Commentary/Strategy
December 11, 2018
15
Important Disclosures and Certifications
I, Barry B. Bannister, certify that the views expressed in this research report accurately reflect my personal views about thesubject securities or issuers; and I, Barry B. Bannister, certify that no part of my compensation was, is, or will be directly orindirectly related to the specific recommendations or views contained in this research report. Our European Policy for ManagingResearch Conflicts of Interest is available at www.stifel.com/institutional/ImportantDisclosures.
The equity research analyst(s) responsible for the preparation of this report receive(s) compensation based on various factors, includingStifel’s overall revenue, which includes investment banking revenue.Our investment rating system is three tiered, defined as follows:
BUY -We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage price change plusdividend yield.
HOLD -We expect a total return between -5% and 10% over the next 12 months with total return equal to the percentage price changeplus dividend yield.
SELL -We expect a total return below -5% over the next 12 months with total return equal to the percentage price change plus dividend yield.
Occasionally, we use the ancillary rating of SUSPENDED (SU) to indicate a long-term suspension in rating and/or target price, and/orcoverage due to applicable regulations or Stifel policies. SUSPENDED indicates the analyst is unable to determine a “reasonable basis”for rating/target price or estimates due to lack of publicly available information or the inability to quantify the publicly available informationprovided by the company and it is unknown when the outlook will be clarified. SUSPENDED may also be used when an analyst has leftthe firm.
Of the securities we rate, 49% are rated Buy, 37% are rated Hold, 2% are rated Sell and 12% are rated Suspended.
Within the last 12 months, Stifel or an affiliate has provided investment banking services for 20%, 7%, 4% and 8% of the companieswhose shares are rated Buy, Hold, Sell and Suspended, respectively.
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Please visit the Research Page at www.stifel.com for the current research disclosures and respective target price methodology applicableto the companies mentioned in this publication that are within Stifel's coverage universe. For a discussion of risks to target price please seeour stand-alone company reports and notes for all stocks.
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Market Commentary/Strategy
December 11, 2018
16
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Market Commentary/Strategy
December 11, 2018
17
