As the world slows, predictions of doom and gloom are at an all-time high. The Nostradamus’s of the financial markets are making bold predictions on what’s to come. The truth of the matter is that no one knows if there will be an Armageddon on the road that lies ahead.
This is what we do know: the past events that lead us where we are today, the current events that will carry us into the near future, and the scheduled events in the near future. From this information we can deduce a pretty good outlook of 2019.
We covered the bulk of events that lead us here today in our Year of Volatility issue last month. If you missed it you can check it out here.
Let’s take a look at current economic conditions and what is to come.
Reports from the IMF(International Monetary Fund) are projecting global economic slowdown for advanced economies for 2019-2020. This does not mean that there will be no growth. What it means is that the economy will not grow as fast as it did in 2018. The global economy is decelerating but make no mistake the US is in the best position to weather any storm that comes her way.
China’s economic slowdown is weighing on the emerging markets along with the uncertainty of Brexit. The most immediate threat to the economy would be trade tensions between US and China. The global economy is counting on a trade agreement to get resolved by March 2019. If there is no solution by March, then the markets will probably vomit.
With economic pressures weighing on China’s economy they will more than likely have to cave in and make a deal. The US has the upper hand to hold out even longer to cause more damage to China if necessary. This pretty much sums up the pissing contest between Xi and Trump.
Trump did US corporations a solid by rewarding them with sweet tax cuts that allowed them to boom growth and profits last year. Well those tax cut benefits are wearing off which also adds to the deceleration factors of the economy.
Unemployment remains at super lows in a tight labor market which brings in worries of wage inflation.
The Federal Reserve has priced in two interest rate hikes for 2019. The markets were totally pissed off with the last hike in December 2018. If the Fed decides to move forward with two more hikes the reaction to expect from the markets is… Puke!
The yield curve is another indicator to focus your attention. If the FED over corrects and moves too late to adjust interest rates, then the yield curve could invert and that would be our signal for heading into a recession.
We are currently experiencing the longest government shutdown in history. President Trump wants $5.7 billion from the $850 Billion fiscal budget for a U.S.-Mexico border wall and Democrats are adamantly against funding a wall. This beef has negatively impacted over 800k federal employees. There appears to be no end in sight, but we know that it can’t last forever. The shutdown further dampens the growth of the economy for 2019.
Now that Democrats are in power, we expect more disruption on the political front that could bleed over into the financial markets causing jolts of volatility throughout the year. The 2020 election is on the horizon so all parties are getting their ducks in a row and the smear campaigns and debates will begin.
As for the stock market, we haven’t witnessed any clear sectors to lead the path forward just yet. With EConomic slowdown in the forecast investors should consider focus in small cap stocks over large cap stocks. For traders, expect more volatility and wild swings. Earnings will paint a better picture as we progress through this cycle.
Though we have no definitive indications of a recession we can’t ignore the increased risks that are on the horizon that can easily push us in that direction. We expect the US economy to continue its dominance but at a slower GDP pace from last year’s 2.9 to 2.5. Buckle your seat belts, keep your eyes on the market, and be ready to capture the quick wins. Take profits often!