Interest rate normalization means headwinds for equities to continue into 2019

Jack Ablin, CIO of Cresset Wealth Advisors, was interviewed on “Money Life with Chuck Jaffe” on October 29, 2018. He explained that  October’s bumpy ride in the markets was evidence that investor expectations are being re-set. It is becoming clearer that the US economy is running unsustainably hot, and that its potential long-term economic run rate is more like 2.5 per cent. Jack said that 2019 will be a year of global interest rate normalization. The US has been backing away from QE for about 18 months; the ECB has announced that it will begin to do so in December and the BoJ is likely to soon follow suit. Jack touched on the fact that, although President Trump is calling out Fed Chairman Powell for tightening too aggressively, the Taylor Rule indicates that US rates are still too low to the tune of 1.5 percentage points; in Europe the differential is an even wider 2.5 percentage points. The necessary normalization of interest rates will present headwinds for the equity market. Jack pointed out that Master Limited Partnerships are cheap relative to their historic valuations and benefit from high interest rates; he also likes financials, consumer staples, and consumer discretionary goods that are purchased with cash. Conversely, he is negative on REITs because they are leveraged and their dividend yields become less attractive in a rising interest rates environment.