Kelly's Notes


2019 Market Outlook

January 23, 2019

If the current economic expansion continues past June, it will become the longest economic expansion on record. So, when will the next recession occur? The likelihood of entering a recession, a period of declining economic activity, usually lasting two quarters or more, does not depend on the length of the expansion. That is,we are never “due” for a recession. There are few signs of a pending economic downturn on the immediate horizon, but economists have raised the odds of a recession beginning in late 2019 or 2020 – still not likely, but also not out of the question.

Market Volatility

  • October/December: The market volatility in October and again in December of 2018 was significant. Through December 21, the stock market was down nearly 9% since the beginning of the month.
  • January: Since December 21 and into January, we have seen the markets slowly recover, as the underlying economy has continued to show strength.

Recession

  • The market volatility particularly in December reflected conflicting economic data, that indicated the possibility of a recession in late 2019. The market reacted/overreacted to this possibility with wild market swings. Subsequent economic data in late December/early January has been more promising, indicating a higher likelihood of NO RECESSION in 2019.

Fiscal Stimulus

The Tax Cuts and Jobs Act of 2017 (TCJA) lowered the corporate tax rate and has added strength to our current economy. The longer-term impact will be better understood as the year progresses.

The Job Market

The job market continues to show job growth trending well above the pace needed to absorb new entrants to the workforce. The unemployment rate continued to fall and wage growth has picked up, and can be expected to rise further in 2019.

Interest Rates

The Fed raised interest rates once a quarter in 2018, but is likely to be more cautious with raising rates in 2019. The Fed has continued to sell the bonds it purchased during Quantitative Easing from 2010 – 2016. This selling of bonds contributed to bond market decreases in early 2018, but seems to have moderated at this point.

Inflation

Inflation subsided in the second half of 2018 and Fed officials are more concerned with future inflation than past inflation. The low trend heading into the new year should allow the central bank more leeway in deciding how quickly to raise short-term interest rates. Starting in 2019, the Fed chairman will conduct a press conference after every monetary policy meeting (eight times per year), rather than after every other meeting.

Trade Policy/Tariffs

Trade policy will be a major uncertainty in early 2019. Tariffs on Chinese goods were set to expand at the start of the year, but that has been postponed, allowing more time for negotiations. An escalation of trade tensions would further disrupt supply chains, add to inflationary pressures, and dampen overall growth through retaliatory efforts abroad.

Fiscal Stimulus and the Budget Deficit

The tradeoff to fiscal stimulus in 2019 is a larger federal budget deficit. The deficit rose to $1.4 trillion, 9.8% of GDP, in fiscal 2009, reflecting the severity of the 2008-09 recession, but then fell to 2.5% of GDP in fiscal 2014 as the economy recovered. The deficit is now expected to approach $1 trillion in fiscal 2019, about 4.6% of GDP.

Additional pressure will arise as the aging population will continue to boost spending on entitlements (Social Security and Medicare) in the years ahead and higher interest rates will add to the government’s interest expense. If we don’t reduce entitlements and defense spending, there’s not a lot left to cut. Nondefense discretionary spending is a little over 3% of GDP.

Tough choices lie ahead. There’s no reason to believe that the national debt is a burden to our children and grandchildren. It doesn’t have to be paid off. The key issue is whether the U.S. can service its debt and roll over existing debt as it matures.

This Time Is Different?

All else being equal, a strong economy, the Fed’s unwinding of Quantitative Easing, and the increase in government borrowing should put upward pressure on bond yields, yet long-term interest rates have remained moderate.

Economic growth was strong in 2018, but beyond a sustainable pace. We know this because the unemployment rate fell, which clearly can’t go on forever. The transition to a slower, more sustainable pace of growth may be a challenge for investors, as such transitions are rarely smooth. However, the economic expansion should continue

We will be watching the markets closely during the rest of the month to see what else unfolds and provide additional updates. Remember to stick with the plan that has been purposely crafted for your personal situation. Markets will go through cycles that take us to new highs and markets will also enter periods of volatility. Making decisions in haste based on an emotional reaction to current circumstances is rarely profitable over the long term.

I hope you’ve found this review to be educational and helpful. As we always emphasize, it is our job to assist you! If you have any questions or would like to discuss any matters, please feel free to give us or any of my team members a call. Feel free to pass this onto someone important to you.

Thank you very much for the trust and confidence you’ve placed in our team.

Kelly Wood, AAMS
Financial Advisor – Wood Tarver Financial
kelly.wood@woodtarver.com

Eric Tarver
Financial Advisor – Wood Tarver Financial
eric.tarver@woodtarver.com

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