This is What Traders Will Be Watching In 2019

Episode Summary

Executive Summary: The episode previews the major market themes for 2019 with Bloomberg guests Luke Kawa and Cameron Christ. They focus on the Fed’s path, trade tensions, political risk from the Trump White House and Congress, debt ceiling drama, and whether valuations in U.S. equities still look attractive versus credit and emerging markets. The discussion argues markets are more vulnerable, but not yet in recession territory.

Main Topics: Federal Reserve policy and rate volatility (Priority: 5/5): A major theme is whether the Fed will continue hiking, how much its communication strategy affects markets, and whether 2019 will bring a renewed rise in rates volatility as the cycle matures. Trade war and tariffs (Priority: 5/5): The guests debate whether Trump will continue escalating trade tensions or stop short once markets push back, with a view that trade risk is more likely to hit U.S. equities than emerging markets. Political risk and the White House (Priority: 4/5): They discuss whether markets are finally pricing political risk from the Trump administration, especially as congressional oversight intensifies and the White House becomes more of a foreground issue. Equity valuation versus earnings growth (Priority: 5/5): The conversation assesses whether U.S. stocks have already de-rated enough, noting that earnings expectations look too high but valuations may still support equities relative to other assets. Credit markets and relative value (Priority: 4/5): The guests consider credit spreads, especially worries about BBB debt, and conclude that equities may offer better relative value than credit at current levels. Debt ceiling and fiscal event risk (Priority: 3/5): They flag the debt ceiling as a potential 2019 market event, though likely less damaging than in 2011 because markets have become somewhat desensitized to such standoffs. Brexit and rotation to value (Priority: 2/5): In quick closing remarks, the guests identify hard Brexit as a likely event and suggest the long-awaited rotation into value stocks may not materialize.

Key Arguments: Markets are more vulnerable entering 2019, so political or policy shocks matter more than they did during earlier parts of the Trump presidency. Trade headlines may be more negative for U.S. equities than for emerging markets, because EM assets have already priced in substantial pain. A U.S. dollar top could emerge in 2019 if the Fed slows hikes and U.S. growth decelerates relative to other economies. Despite weak earnings expectations, U.S. equities may still offer an acceptable risk premium because valuations have already compressed. Rates volatility could rise if investors become more uncertain about the Fed’s terminal path and the timing of the policy turn. Forward guidance and the dot plot have anchored market expectations, suppressing volatility, but may also foster instability by encouraging risk-taking. Credit spreads are likely to widen over the rest of the cycle, making equities look more attractive than credit on a relative basis. The debt ceiling may create headlines and short-term risk, but it is less likely to destabilize markets than in the 2011 episode. Trade policy remains a live political tool for Trump, likely used for symbolic wins until markets or politics force restraint.

Data Points: Fed hike probability: 50-50 - Markets were pricing roughly even odds that the Fed would hike at all in 2019 at the time of recording. Recording date: December 18 - The hosts repeatedly note the conversation is recorded right before the December Fed decision. Tariff amount: $200 billion - Referenced as the size of tariffs imposed by Trump that triggered market concern in late 2018. Federal Reserve decision cadence: Every meeting - Starting in 2019, every Fed decision would be accompanied by a press conference. Prior press conference frequency: Four years - The hosts note that before the change, not every meeting had a press conference and previously there had been a lower frequency. Prior state of press conferences: None a year - Mentioned as the earlier practice before the Fed increased communications. U.S. earnings growth consensus: About 8% - Top-down forecasts for U.S. earnings growth over the next 12 months were described as too high. U.S. valuation level: About 15x - Luke cites the U.S. market at roughly 15 times forward earnings relative to spot earnings. Earnings yield: About 6.5% to 6.7% - Derived from the forward P/E discussion as a measure of the U.S. equity risk premium. Potential real earnings yield: About 4% to 4.5% - Projected by mid-next-year if inflation evolves as expected. Volatility comparison: Higher than since the taper tantrum - The ratio of short-end to longer-end swaption volatility was described as moving sharply upward.

Pivotal Quotes: "I think the market is in a much more vulnerable place." — Luke Kawa: Used to explain why political and policy shocks may matter more now than earlier in the Trump era. "I expect a hard Brexit." — Luke Kawa: A concise closing forecast of one major 2019 macro risk. "I expect that the rotation to value that we've been waiting for forever does not happen." — Cameron Christ: Final takeaway on equity style leadership going into 2019.

Implications: Listeners should expect 2019 to be driven by policy risk, especially the Fed, trade, and politics. Even if recession is not imminent, volatility could return and relative-value opportunities may favor equities over credit.