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Do the Markets Support a Rate Hike?

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Gundlach thinks global GDP growth didn’t warrant the December rate hike

Back in November 2015, Gundlach presented what he referred to as “the most bearish chart of the US economy” during a webcast. In the chart, Gundlach pointed to the S&P 500 (SPY) (IVV) (VOO) earnings growth. Notably, over a good four decades, the S&P 500’s net profit margin has fallen when the economy was on the verge of, or already into, a recession. The dips in the S&P 500’s profit margin and ROE (return on equity) have either coincided with or led to recessions including the 1990–1991 recession, the dot-com bubble, and the financial crisis. With the current market environment seeing a similar fall in the S&P 500’s (SPXS) (SPXL) net profit margin, Gundlach held his view that global GDP growth didn’t warrant a rate hike in December 2015.

GDP forecasts

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Does US real GDP growth support a rate hike?

In his recent webcast, “Turning Points,” Gundlach presented a chart showing US real GDP forecasts. It was yet another shocking chart pertaining to the US economy. Gundlach used this chart to highlight that analyst expectations for real GDP are at an all-time low. Expectations for 2016 real GDP, which were pegged at 3% about two years back, have been falling continuously. Now, estimates are down to a meager 1.5% for the year. Markets usually expect monetary policy easing to follow such declining growth situations. The markets clearly don’t support a rate hike at this time.

Interestingly, Gundlach’s view of a rate hike comes at a time when the Fed is considering whether or not to raise interest rates at each and every FOMC (Federal Open Market Committee) meeting!

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