James McDonald
More and more investors are concerned about an oncoming recession in the next year. However, finance expert James McDonald of Hercules Investments isn't among the pack. For him, the Fed's interpretation of the economic data is a clear sign that they are taking the actions necessary to avoid a recession.
"There are certainly many who worry about a near term recession, but I am not one of them," McDonald, CEO & CIO of Hercules Investments, tells GlobeSt.com. "In terms of looking at economic data, no lens is clearer than that of the Fed. Its biggest purpose is to prevent inflation and unemployment, the two biggest arbiters of economic recession."
The latest meeting in September showed a positive economic outlook of the economy. "The committee doubled down on its commitment to continue to use the inflation modeling simulations that have according to the minutes 'served the Committee well in the aftermath of the 2008 financial crisis,'" says McDonald. "It attributed volatility in Global Financial Markets primarily to U.S. China trade tensions, which are substantially moving in a positive direction after Friday's phase 1 US-China trade pact, and repeatedly referenced market survey based indicators of policy rate expectations as a predictive indicator of how positive economic momentum can be sustained."
Reading through the notes, McDonald believes the Fed is "implicitly" saying that it is monitoring the markets and will react accordingly. As a result, the Fed should lower interest rates as needed. There could be interest rate reductions at both the October and December meetings. "I'm not alone in that belief either; the S&P put in its biggest 3 day rally in over a month after the minutes were released," says McDonald. "Of course the Fed can't and won't explicitly pander to the market's desire for more rate cuts; the minutes indicated that projections on the best future path for rates showed policy makers were divided. Five thought it was a mistake to cut rates, five agreed with the reduction and thought that would be enough this year, and seven favored another decrease by December."
Consumer spending also remains strong, which is an important barometer for the next recession. "Officials agreed consumer spending was increasing at a strong pace and household spending was likely to hold up, while several said the housing sector was starting to rebound as mortgage rates fell," says McDonald. "It was a see-saw week leading up to the release of the minutes, as data reports subsequent to the minutes release on manufacturing, services and payrolls all came in weaker than expected, but then hiring was still enough to push the U.S. jobless rate down to a half-century low of 3.5%."
This activity is enough to offset any predictions of a recession, according to McDonald. "In my opinion, there's enough of a balance of good data and bad data that provide the Fed with a defensible rationale to give the market what it wants: more rate cuts in 2019," says McDonald. "If the Fed does cut rates on either of the two remaining meetings for 2019, which I believe it will it will give a confidence boost to the stock market and the economy as it has in the past. If the Fed does not cut rates again in 2019, the non-action will be viewed as a negative surprise and will provoke a 5-10% pullback in the S&P 500."
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Kelsi Maree Borland
