Here’s a string of headlines that came across today, and you tell me, how confident are these guys:
“Fed’s Kaplan: Bulk Of Impact From Tax Cut To Be Felt In 2018
KAPLAN SAYS U.S. MAY NEED TO MORE ACTIVELY CONSIDER WAYS TO REDUCE U.S. GOVERNMENT DEBT GROWTH
FED’S KAPLAN SAYS BOOST TO GROWTH FROM TAX CUTS WILL FADE IN 2019 AND 2020
FED’S KAPLAN SEES U.S. GDP GROWING 2.5 PCT TO 2.75 PCT THIS YEAR
FED SHOULD RAISE RATES ‘GRADUALLY AND PATIENTLY’ THIS YEAR, KAPLAN SAYS
Fed’s Kaplan: Waiting Too Long On Rate Hikes Increases Likelihood Of Recession
Fed’s Kashkari: Should ‘Take Our Time, And Let Inflation Come To Us’
Fed’s Harker: Would Have To Think Long And Hard About Pros And Cons Of Raising Inflation Target
Fed’s Harker: U.S. Inflation To Reach Or Exceed 2-Pct Goal By End Of 2019
Fed’s Harker: Two Rate Hikes This Year Are Likely Appropriate
Fed’s Harker: Sees U.S. GDP Growth At 2.5% This Year, 2% Next Year”
My take fwiw: None see GDP growth anywhere near 3% in 2018 and are likely seeing GDP growth decreasing in 2019. Funny enough that does not match match the lofty GDP growth projections peddled by the administration to push through their tax cuts. That glaring gap will have tremendous implications not only for the deficit, but also for 2019 earnings projections.
And I suspect the Fed knows it and is raising the alarm bells as they see tax cuts to only provide a temporary boost, not a long term structural change: In short: Bad policy. So now they are again struggling balancing how to hike rates into a debt riddled economy as yields are rising.
And if home sales are any indication the few rates hikes they have implemented so far are already impacting the housing market in a big way:
Equity prices remain high and expectations remain just as high as companies are benefitting from tax cuts and are putting them to work. Buybacks gone wild:
To put this all together: If earnings growth is accelerating in 2018 as a result of tax cuts and buybacks, yet growth is slowing in 2019 despite tax cuts then, on a comparison basis, expanding earnings growth is a massive challenge in 2019, likely making 2018 a peak which is a problem is you’re running a market hot on 25/26 GAAP P/Es.
Every cycle has its peak. And if markets are a future discounting mechanism they will have to confront this emerging reality at some point prior to 2019.