We Live In Interesting Times

2018 was a year of dichotomy.  Unemployment neared a 50 year low by the end of 2018, BUT recession fears have increased¹.  Corporate earnings were very strong, BUT stock prices fell into correction territory by year end¹.  The question is…. will solid fundamentals outweigh the sentiment of uncertainty¹?  For much for 2018, the tax cuts passed in 2017 aided in strong US economic growth with GDP growth and Earnings Per Share (EPS) growth of the S&P 500 was coming in higher than estimated at 22.6%.¹

So, what happened in the final quarter (Oct-Dec) of 2018?

Higher interest rates and hints of inflation, plus worries and concerns over slow economic growth, trade issues, Brexit, falling oil prices, political dysfunction and uncertainty in the Fed Policy have clouded the picture. ¹

So, what might be important for us to watch for in 2019:  In the US Economy, unemployment is predicted to be near all-time lows and wages will continue to rise. These strong gains highlight the underlying strength of the consumer and near record confidence should keep consumers and businesses willing to spend¹.  It is predicted that the US economy may continue to expand (making it the longest expansion in US history despite GDP slowing), but at a slower pace than the years past¹.  Corporate earnings growth estimates may weaken for 2019 and 2020 with the increased pressures on profits and revenues².  Some predict, US stocks to have positive returns though they may not reach the record highs of years past, for the first time in 10 years¹.  Unfortunately, the federal budget deficit is predicted to near $1 trillion (highest for non-recession period) and the Trade Wars are likely to continue sparking volatility¹.

Volatility was largely absent in 2017, increased in 2018, but is predicted to return to more normal levels in 2019².  Historically, average volatility in the market has been 4 or more days with corrections greater than or equal to a 5% drop in market performance, in 2018 there were only 2 such days³.   It is thought that we will be closer to historical rates in 2019.  We should see the continued effects of Fed Tightening with at least one (and most likely only one) hike for 2019².

Earnings were the biggest determining factor for 2018 Performance. It is believed that 2019 success will be largely determined by liquidity, credit spreads are a very important liquidity driver, this helps determine the cost of borrowing².

Look for Non-US Stocks to potentially outperform US stocks as the dollar declines but political drama could slow this some.  Watch for emerging markets (EM), particularly Asian EM to benefit from a trade deal, along with the Fed slowing and the dollar stabilizing¹.

There are so many factors that may prove to make 2019 an interesting year in the markets and in the headlines. It is important to remember that having a plan that is relative to your time line, to your goals and risk tolerance is increasingly valuable in times of market turbulence. Understanding how cash flow is generated in your portfolio and how that relates to the overall market is also important. The ride that you are witnessing in the headlines, may not be the ride your portfolio is experiencing, and that should help to ease your day to day concerns.   Please let us know what questions you may have.

Sources

1. Doll, R. (2018, Dec). 2019: Choppy and Frustrating, But No Recession. Nuveen.

2. Legg Manson, multiple authors. (2018, Dec.) Outlook 2019: Shifting Signals. Legg Manson.

3. Adam III, Lawrence V. (2019, Jan) Ten Themes for 2019; Credibility Challenges 2019 Presentation, Raymond James

4. Minaya, Jose. (2018, Dec.) Expect a Tougher Climb. Nuveen.

The S&P is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would never incur fees and expenses which would reduce returns. There is no assurance any investment strategy will be successful. Investing involves risk including possible additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Any opinions are those of the author and not necessarily those of RJFS or Raymond James. The information has been obtained through sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and subject to change without notice.