Fed Zeppelin: Is the Fed making a mistake?

We were optimistic about a 2019 rebound in the US and in Emerging Markets, as described in our Dec/Jan Eye on the Market notes. But markets have now moved even higher than I expected. US equity valuations are well above median again despite consensus US EPS growth of just 3% for 2019.

The recovery from the December 2018 equity bear market is now the fastest in the post-war era. The fuel for the rally: the US Fed, whose newfound patience means no more balance sheet reduction, and no more rate hikes. The benefits are global, particularly for Emerging Markets. We look at the essential high-stakes gamble the Fed is making: that the linkage between unemployment and inflation remains broken.

China is the other driver of the rally, due to increased probability of a trade deal (whose likelihood we felt was high given deep bilateral US-China economic linkages compared to prior historical adversaries), and plenty of Chinese stimulus.

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