‘Fair Value’ Rates Likely to Be Lower

In a lengthy interview with Bloomberg Markets, Cresset Wealth Advisors’ CIO Jack Ablin detailed his views on factors that will affect the economy and stock market performance in 2019. Investors started the year in the most dour frame of mind since the global financial crisis, and the market was oversold. It has bounced thanks to their extremely low expectations, which have proven easy to beat.

The US-China trade war is perhaps the biggest uncertainty. Jack points out that China has more influence on the global economy than any other country. The Trump administration initially threatened the use of tariffs as a tactic for dealing with the Xi regime, but it has become a strategy. The key question is whether this strategy will in turn become an instrument of policy. If so, this would reverse trends that have been in place since the 1980s: globalization, rising productivity and falling inflation. He believes at the present time that the two countries will ultimately reach an accord; it is important to bear in mind that China faces other, bigger problems than a trade war, including an already slowing economy, an already bumpy transition from an investment-driven to a consumer-driven model, and managing social tensions, to name but a few.

Jack underscored that 2019 will likely be a year of US dollar weakness because of the evolving trajectory of the Fed; its presumed tightening bias will probably be trimmed somewhat. The Taylor Rule tells us that interest rates ought to be higher based on current economic conditions. However, risk takers, investors and businesses have become accustomed to low interest rates, so shifting them upward is likely to have a negative economic and market impact. As a result, Jack believes that we have now moved into an environment in which what is considered “fair value” for interest rates is likely to be lower than in the past.

Regarding portfolio allocations, Jack remains underweight equities. Within that stance he will be shifting some US Large-Cap Growth positions into Developed International, both large and small cap. When he begins to see some clarity on China issues, he will consider adding some Emerging Market exposure – EM is the cheapest major asset class in the world.

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