Goldilocks Vs The Bear: The Bear Wins

The environment that the Federal Reserve envisions for the economy won’t be friendly for stocks.

The Wall Street Journal reports (and I agree), Even a Goldilocks Economy Could Be a Bear for Stocks.

On balance, policy makers expect to raise rates four more times by the end of next year. The economy will slow, with gross domestic product up 2.5% on the year in the fourth quarter of 2019. The unemployment rate will drift a bit lower to 3.5% and inflation will come in at 2%.

What is the outlook for companies under that scenario? If their demand grows about as fast as the economy, adding in inflation, sales would be up about 4.5% in the fourth quarter next year. So the only way for profits to grow at a faster clip would be for profit margins to expand.

That seems like a bad bet. Even after adjusting for the effects of this year’s tax cut, profit margins for companies in the S&P 500 are historically quite high. Then consider how hard it would be to contain, much less cut, labor costs with an unemployment rate at 3.5%.

Bad Bet

Image from Five plot holes often overlooked in the story of Goldilocks and the Three Bears.

The WSJ article puts things mildly.

It’s not a “bad bet” to think profit margins will expand. It’s a “horrible bet”.

Eight Reasons Financial Crisis is Coming

I note Eight Reasons a Financial Crisis is Coming

Yes, that is looking at things quite pessimistically. Yet, even the alleged Goldilocks scenario is unlikely to keep stocks on track.

Anything worse spells serious trouble. Any of eight things will suffice. I expect all eight.

And if Goldilocks appears?

Most likely, you still lose, for seven straight years.

Click on the above link for further discussion.