2019 Market Predictions
It's that time of year again to give you, our clients, the Schmolke Investment Team's thoughts on the markets and our perceived direction in the coming year, especially after what has been going on during the last quarter of 2018.
Investment markets are dynamic and are constantly looking into the future (this is the most fundamental explanation). They often give us a clue where they are going by many indicators and messages that they send for those who are paying close attention. The one thing that always speaks the truth when it comes to the markets are the fundamentals. Market fundamentals are generally macroeconomic influences like inflation, monetary policy, unemployment, corporate earnings, trade and other factors that influence corporate, economic and global growth that all govern the U.S. and global economies.
It has been a wild year and the new normal is volatility. In the last quarter of 2018 we have seen some incredible days of ups and downs. The biggest up day in points in U.S. market history was December 26, 2018 which was up 1,086.25 points on the Dow Jones Industrials, a 4.98% move in one day (1).
Before our predictions, let's first review the 2018 U.S. markets over the almost last 12 months.
According to Morningstar, an investment analytics company, the 2018 broad market has been almost flat for the year as of December 10, 2018 (2) but that has recently changed in the last couple weeks of December.
During the first part of 2018, the markets were up, and some say it was due to the new administration's pro-business policies, reduced corporate taxes and the surge in deregulation. Then we saw a correction occur over the last quarter of 2018 with increased volatility.
Looking back at the epic 2017 year, the Dow Industrials were up about 25%, NASDAQ was up 28%, and the S&P 500 was up 19% (3), which is quite a different backdrop as compared to 2018. But again, volatility seems to be the new norm. According to Credit Suisse, volatility is likely to persist for some time into the future (4). We agree.
The U.S. markets had their best performance in the third quarter of 2018, but the fourth quarter has been down considerably. Gold and Silver has also been down most of the year, Oil prices have been all over the board, but currently down as well and overall bonds have been down since the Federal Reserve has been slowly raising interest rates. From Chairman Powell's latest comments, we expect interest rates to stay the same for the next couple quarters, but possibly two more rate hikes in 2019.
Let's not forget that the Dow Jones Industrials started below 20,000 in January 2017 and peaked at 26,458.31 on September 18, 2018, just a few months ago (5).
In other markets outside the U.S. during 2018, overall Emerging Markets are down by -16.9%, the EMU Index (about 85% of the Eurozone) is down -18.5%, the UK is down -19%, Japan is down -11.9%. Some of the other hardest hit countries are Argentina, Pakistan, Greece, China, Italy, India and Ireland (6). Therefore, international markets have been down mostly across the board. This has had a pull on our markets and could be contributing to the recent market decline and volatility.
Let's look at some of the fundamentals that we keep a close eye on:
Interest Rates (Monetary Policy):
You may have heard in the news that the Federal Reserve has been slowly raising the federal funds rate, which is the rate banks charge each other for overnight loans (or short term rates), interest rates at a 25-basis (.25%) point clip for the last number of quarters. We suspect this could continue but could potentially slow during 2019. The Federal Reserve raised interest rates again on 12/19/2018 by another 25 basis points (.25%) and has recently indicated they may slow down the process of raising rates. The current Federal Funds rate is a range of 2.25% to 2.50% (7) but could reach 3.00% in the next year if the Federal Reserve follows through on indications of two more 25 basis point hikes. In real rates this is still a positive.
Inflation:
Inflation has been somewhat of a mystery over the last eight to ten years. The Federal Reserve has indicated their inflation target has been 2% (6) for some time, but it is a bit confusing why it isn't higher when we have such a low employment rate and growing economy. We believe it is the result of disruptive technology in businesses and lower oil prices. The biggest disruption has been computing power, which is said to double every 18 months (8). The result for companies is increasing efficiencies, this entices competition and lowers competitive prices, even if wages are rising. Technological advancements create more breakthroughs at a faster rate than ever before in history, which also lowers prices. In the past the Federal Reserve has always used inflation as one of their primary indicators and they have not seen low inflation data in such a strong economy before. We see this as a very positive condition for the markets in 2019.
Employment:
Since the 2008-2009 recession, unemployment has been improving. According to National Public Radio (NPR), the U.S. unemployment rate has dropped to 3.7% from August's 3.9% as of December 2018, the lowest its been sine 1969, and the U.S. economy has now added jobs for eight straight years (9). Recently is was adjusted down even a little lower, which we anticipate to continue into 2019, another very positive indicator.
Oil Prices:
According to Statista, the statistics portal, the average OPEC crude oil prices for 2018 were $71.20 per barrel (in U.S. Dollars) and in 2017 the average price per barrel was $52.51 (10). Higher oil prices usually reflects better global economies. Oil prices could also be volatile during 2019 but generally speaking, we see prices stabilizing in the $50 to $75 per barrel range.
Consumer Confidence:
Consumer confidence, according to OECD Data, peaked in the spring of 2018 and has tailed down a little since then, but still considered high (11). This is not abnormal or any cause for concern in our opinion, just part of the cycle. In general, the recent holiday sales were very encouraging, and the malls and shopping were busy. Since unemployment is low, we see consumer confidence staying strong. Another positive since consumer confidence drives corporate earnings.
Corporate Profits:
Corporate profits are fundamentally important because profits allow a company to reinvest in their business and create more jobs. Companies overall continue to report earnings growth due to a number of reasons, one of which is reduced corporate taxes. We see the economy as a fertile ground for continued growth in corporate earnings.
Volatility:
There are many factors that effect volatility, like mixed market signals, economic news, political news, global news, trade wars and peace treaties, etc. In sell offs and down markets, emotional selling is a powerful force, and index accounts and automated accounts are susceptible. In our opinion, if you do not utilize a financial advisor, people tend to react to down markets by selling when markets are declining, which is commonly a mistake. Conversely, when markets are rising people want to buy. The new norm is the markets are going to be volatile, but this is not a bad thing, as volatility creates opportunities.
Debt:
We include this category because of the rising corporate and personal debt in our country is getting alarming. Our government has always run its operations on debt, and we will continue to do so. Our national debt is now close to $22 Trillion, the largest in our history. Corporate debt is also growing, which isn't as alarming when profits are up. School and personal debt is also at historical levels, which is alright when unemployment is at such a low level in our opinion. We will keep a close eye on the national debt and hope that our elected officials can curtail their spending with some sort of spending reform. Debt is an area we will keep a close eye on during 2019.
Fears that are influencing investors and the markets:
1. Trade war with China.
2. A divided political environment
3. Potential inflation
4. The national deficit
5. Potential recession
6. Rising interest rates
7. Corporate and personal debt
8. Rising taxes
9. Geopolitical issues
The bottom-line is that the overall market has always tracked the underlying trend of the U.S. economy and the U.S. economy has been doing spectacular. We are having an estimated 3.5% GDP growth, 25% earnings growth, a historic Christmas, the forward price-earnings ratio is 15.6 and the long-term trend is 16.4, so the market is trading under its long-term trend and value, all positives.
We also believe that the markets are very oversold and at some point, we will see a clear turnaround. We predict, albeit with some caution, that 2019 will be a volatile year with an overall 12% to 15% target growth. There are many unknown variables that could impact this prediction like the trade war with China that we are locked in, what the Federal Reserve will do with interest rates, inflation tendencies, how the Eurozone markets perform, unemployment, consumer sentiment, Trump's texts ;-) and geopolitical stability. Clearly, it is in our country's best interest to get a "Fair" trading arrangement worked out with China, but this is not something that will be fixed in short order, as it has taken over 40 years to get into the imbalance, we currently find ourselves in.
The U.S. government announced on Wednesday December 19, 2018 that the U.S. unemployment rate hit a 50-year low and they revised the last quarter's GDP growth to 3.5%. This is almost three times the average GDP growth years during the Obama years.
From what we could find, in the history of the U.S. economy, there has never been a recession when the economy is doing this well! Another reason we are bullish on 2019.
Will the economy slow in 2019? We think so, but that's not a bad thing. We would rather see a steady 2.5% to 3.0% economic growth pattern, as that is probably more sustainable over the long-term. All of the political stuff going on, the trade war with China, troops at the Mexican border, the government shutdown or any other political shenanigans affects what's happening in the U.S. economy, it's all white noise.
We also have seen, or maybe still seeing, a stock market correction and not a bear market or a recession as of this writing. Corrections are a normal process and can fool the unaware or amateur investors. This is why you work with a professional team at Schmolke Investment Team that keeps you in the market when conditions are challenging.
Thank you for putting your trust in us, and Happy New Year!
Bart & Brian
Schmolke Investment Team
(1) https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average
(2) http://news.morningstar.com/index/indexReturn.html
(3) https://money.cnn.com/2017/12/29/investing/stocks-2017-wall-street/index.html
(4) https://www.ft.com/content/01fccafa-fc9b-11e8-ac00-57a2a826423e
(5) https://www.statista.com/statistics/261690/monthly-performance-of-djia-index/
(6) https://www.yardeni.com/pub/peacockglstkytd.pdf
(7) https://www.bankrate.com/rates/interest-rates/federal-funds-rate.aspx
(8) https://inflationdata.com/articles/2018/06/19/impact-disruption-inflation/
(10) https://www.statista.com/statistics/262858/change-in-opec-crude-oil-prices-since-1960/
(11) https://data.oecd.org/leadind/consumer-confidence-index-cci.htm
(12) https://www.foxbusiness.com/markets/is-the-stock-market-undervalued-the-data-says-yes
(Fox News – Is the Market Undervalued)
This contains forward looking statements and projections. There are no guarantees that these results will be achieved. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance may not be indicative of future results. Therefore, no client should assume that the future performance of any specific investment or investment strategy will be profitable or equal to past performance levels.