David Jones  |  October 29, 2018

The Fed has been a constant topic ever since Jay Powell became Chairman of the Federal Reserve.  Under his short tenure -eight months- Powell’s Fed increased the Federal Funds Rate three times; he assumed this office in February.  ERRATA:  In a October 25 email I said Powell increased rates six times.  

Janet Yellen’s Fed increased rates five times in her four year tenure.

In early October Powell appeared on PBS with Judy Woodruff for a Q and A.  The presentation should have given solace to investors.  Some soundbites follow: ….”inflation is right at our goal….we don’t think we are in danger…where wage increases ( now 3% up from 2%) are going to provide price inflation…..(the US) is in a remarkable set of economic circumstances…I  think there’s no reason to think (the growing economy) ….can’t continue for some time….there is really no reason to think that this cycle can’t continue for some time….effectively indefinitely.”  Powell later acknowledged that a slow down will occur at some future date.  What roiled markets was a the comment “we are a long way from neutral at this point (referring to interest rates)”  this statement should have been “our approach is very gradual and data dependent”-my words.

On October 17 the Fed released the minutes from their September meeting which shed some light on term “a long way from neutral”.  Consensus expectation by voting members of the FOMC for Fed Funds Rates  follow:  2018 2.25-2.50%, 2019 and 2020 3.25-3.5% and longer term 2.75-3.00%.  In my view, these rates are historically low.  Over the last sixty years Fed Funds have ranged from near zero to over 20%.

Valuations*

S&P 500 p/e now stands at 14.9X 2019 estimates and 13.6X 2020, close the the lowest levels since early in the current decade.

Foreign p/es are in many cases lower.  Emerging markets average 10X,  developed markets typically range from 12 to 14 times.

Interest rates in developed markets range as low as zero in Japan to about 0.3% for the German Bund.  The US ten year is at 3.08%.

*Based on I/B/E/S Reuters October 26 estimates 

Robert J Voccola,  CFA

 

Certain clients of MDX wealth Management are holders of the common shares of both companies as is the writer of this blog.