After a bear market (20%) decline in stocks in the 4th quarter of 2018, the stock market is off to a positive start in 2019. When you read the news, it seems incredible that stocks could be rising. Certainly, there seems to be plenty in the news to be worried about: the government shut-down, a trade war with China, slowing global growth, rising interest rates, falling oil prices, weak housing reports, and more. Yes, risks are rising in 2019 and we are likely in store for more volatility in the months to come. However, behind the barrage of negative news is a stream of positive economic data showing continued strength.
Indeed, it appears that some of the risks could be overblown in the minds of investors. For example, while the government shutdown does impact economic growth, it is temporary and as of this writing at least an interim deal has been reached to re-open the government. In contrast, the trade war with China is likely not a temporary event but is also not significant to the US economy. Total trade with China represents less than 1% of US GDP, and economists estimate that a tariff as high as 25% on all Chinese goods would lower the US economy by less than 0.1%. Lastly, the Federal Reserve’s Plans to raise interest rates has weighed on investors. Certainly, raising interest rates puts the brakes on the economy and the risk of a policy error, raising rates to fast or too slow, is a significant risk to both stocks and bonds in 2019. However, Chairman Powell has already softened his language on rates, saying in a January 5th statement that “there is not preset path”, implying that the Fed will be very careful and data driven with raising rates.
Meanwhile, leading economic indicators continue to show strength. The forecast for GDP growth for 2019 is 2.3%, still above the post-recession average of 2.2%. Small business optimism is still high, personal incomes are rising, retail sales are strong, household balance sheets are strong, savings rates are rising, and the US has record high job openings and record low unemployment. The Federal Reserve’s press release from December indicated that “the labor market has continued to strengthen, and that economic activity has been rising at a strong rate”, while “indicators of longer-term inflation are little changed on balance”.
At the beginning of the year it is always popular to make predictions for what will happen in the coming months. Predictions are dangerous, and rarely accurate. Our primary expectation for 2019 is that we are likely to have more volatility as we experience periodic growth scares like the one we had in 2018. However, volatility is not all bad. Our approach is first to be risk aware, making sure that strategies are appropriately defensive for the goals of our clients. Then, by being disciplined and risk aware investor, we can use volatility to buy assets at a discount, giving us the opportunity to provide better long-term returns. We remain confident that the discipline and strategies we employ will navigate 2019 despite the rising risks.
Timiraos, Nick, Wall Street Journal, “Powell Suggests Rates Will Be on Hold” January 5th, 2019
Ip, Greg, Wall Street Journal “Trade War’s Impact Has Been Minor. That Could Change” December 4, 2018
Federal Reserve Press Release, December 19, 2018