Volume 47 April 2019

2 ROE REPORTER | DKAM Market Outlook Compared to 2018, we have adjusted our outlook for the stock market. We were defensive over the past year, holding relatively high amounts of cash and short positions. The fund has calibrated according to the new outlook and we are now fully invested. What has changed since the end of 2018? The Federal Reserve has normalized interest rates from the artificially low levels due to the 2008 financial crisis. The Federal Reserve is tasked with a dual mandate of maximizing employment while keeping inflation stable. The unemployment rate is at its lowest level in over 50 years while inflation has been stable for over 20 years (Figure 1). Both of these facts allow the Fed to sit on the sidelines for now and keep interest rates stable. We view the direction of interest rates as the most important indicator of the direction of stock multiples. With lower discount rates for stock valuation, lower interest payments for corporations, and lower yields offered in fixed income, investors are able to pay higher multiples for stocks. At this time last year, there were half a dozen interest rate hikes projected and the fear was that the Fed would raise interest rates to the point where they choked off the economy. Now there are no interest rates projected and the economy appears robust. What could bring the Central Bank off the sidelines and raise rates? Inflation. As of right now we don’t anticipate inflation in the market and we’ll highlight a few charts in order to illustrate the point. We don’t foresee the cause of heightened inflation of the 70’s-80’s returning to the market anytime soon. The high inflation periods of the 70’s-80’s was an anomaly and this deviation is explained by the following charts. Figure 1.