Here is why slowing growth doesn’t have to be fatal for the market.

More levers are being pulled these days than a drag line operator working late on Friday.  Between the Fed, private employers, budget deficits, OPEC, US-China trade negotiators, and the richness of the equity/bond markets, there’s plenty of clues to where the economy and ultimately the equity markets are headed for the remainder of the year.  Of course, the Fed and Chairman Powell will be the most important players as evidenced by the recent rally after the Fed’s dovish tone early this year.   Recent March data has proved to be optimistic about our current state despite widespread belief that growth is slowing.

Slowing growth for the economy does not have be fatal for the long running bull market. 

Here are a couple of reasons why.

• The Fed has confirmed it will be patient in its attempt to normalize short term rates and reduction of the balance sheet will end in September.  Both are dovish and as evidence of Mr. Powell’s new mindset he decided to hold the federal funds rate at its current level.  Just in time according to December’s market volatility.
• Inflation as measured by both the CPI and the PCE were reported subdued with year over year measures below the Fed target.  This helps reduce the risk of a Fed over tightening and causing a recession. Below target inflation gives the Fed time and reason to less hawkish in its policy.  (Even though the Fed still feels the need to raise short term interest rates as part of their longer-term strategy.)
• Rapid growth, which was a concern during much of 2018, has subsided.  Fed and others have lowered their growth forecasts from the upper 2%-3% range to the lower 2%-2.5% range. This gives the Fed more reason to be patient in its path to normalization.

And what about valuation?

The equity markets can trade at multiples within a very wide range.  They can trade at a high multiple for many weeks if inflation is low to moderate and the Fed is accommodating.  These conditions are present now, making 3,000 on the S&P a real possibility.  ($167-$170 in earnings with a price earnings multiple of 18.)

Of course, there are several factors I mentioned earlier that may not prove to be so favorable to the public markets.  Employment and wage growth are worth watching as they could get the attention of the Federal Reserve Board quickly.  And at some point, unless the Modern Monetary theorists, who claim “deficits don’t matter” when a sovereign government can issue its own fiat currency, and all the hand wringing over the government’s solvency is absurd, are right, the public deficit will begin to matter.  This could change everything quickly.

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