What’s in the Economic Store for 2019?
This article appeared in the January 2019 edition of Nevillewood Living.
With the Holidays behind us, and as we begin to reckon
with our New Year’s resolutions, a moment of reflection and outlook may make
sense. Looking back, 2018 was a year of
strong growth in the economy, employment and corporate earnings. Reflecting this positive backdrop, the
markets were strong early in the year.
Some jitters did emerge during the 4th quarter, however, as
concerns over growth rates, higher interest rates and trade tensions garnered
headlines, and opinions began to diverge regarding the path forward for the
economy and markets.
So, what is in store for the economy in 2019? Let’s review a few of the key data
U.S. gross domestic product (GDP) is, in simple terms,
the market value of all the stuff we produce in a given year. GDP is one of the most widely followed
measures of economic health and growth.
Forecasts for 2019 GDP growth are hovering around
2.5%. This is a healthy number, albeit a
bit lower than the 3.1% growth the economy was tracking in late 2018 (in 2018,
GDP received a boost from the tax cuts).
Potential positives for 2019 GDP include continued strong employment and
consumer spending, robust business investment and historically low interest
rates. Potential concerns include a
rising dollar, and continued trade tensions.
The stock market tends to move in the direction of
corporate earnings, so this is a closely watched measure. Expectations for corporate earnings growth in
2019 are hovering around 9%. Again, this
is a healthy number, but it would be down from the blockbuster 21% growth
expected (as of November) for 2018. For
2019 corporate revenues are expected to grow 7%, vs the 9% expectation for
Earnings growth forecasts for 2019 are thus quite
positive, but growth levels clearly are expected to moderate from the breakneck
pace seen in 2018. Potential tailwinds
to 2019 earnings growth include the continued strength of the consumer. Also, corporations are buying back their own
shares at a record pace, which (all else equal) leads to higher per share
earnings. Potential challenges include
the effect of higher wages and raw materials on profit margins, and the higher
dollar, which makes the products of U.S. companies less price competitive in
the global marketplace.
Throughout 2018, the rise in interest rates has generally
seen as a natural byproduct of a healthy economy. Levels are being closely watched, however,
because higher rates affect the borrowing costs of consumers and businesses
and, thus, economic growth. The Federal
Reserve recently raised short term interest rates to 2.25%, and is expected to
push rates to 3% in 2019. Such a move
would likely be seen as a positive consequence of an expanding economy. If inflation heats up, however, the Fed could
move to raise rates more aggressively, and this might be viewed as a negative
for the economy.
How It Affects You
Our sense is that the debate over the expected growth rate will likely intensify in the coming months. Given, however, the positive forecasts and expectations for 2019, it probably makes sense to stick to your long term strategic allocations. But certainly stay prepared to rebalance your portfolio, perhaps with more frequency if volatility continues to be high.
The opinions voiced in
this material are for general information only and are not intended to provide
specific advice or recommendations for any individual. All performance
referenced is historical and is no guarantee of future results. All indices are
unmanaged and may not be invested into directly.