Big questions to consider this year
We should have seen this coming from a mile away. After nearly 10 years of surging stock markets, punctuated by a stellar 2017, 2018 had to be a disappointment. With the turbulent year in the rear-view mirror, it’s time to look ahead and tee up five questions that will frame 2019.
1) How will the U.S. economy perform? 2018 was likely the strongest year of growth since 2005 (final figures will be available in January), but with the impact of the tax cuts receding and interest hikes already causing a slowdown in some sectors such as housing, the economy is likely to lose momentum in 2019.
Estimates for Gross Domestic Product range from 2.5 - 2.8 percent, which should still be strong enough to create jobs, maintain a low unemployment rate and keep wages rising.
2) Will interest rates keep rising? The Fed raised short-term interest rates four times in 2018 to a range of 2.25 - 2.5 percent. Based on recent predictions, it expects two increases in 2019, as growth moderates. (The first policy meeting of the year will be held on Jan. 28 and 29, but few expect officials to make any moves until the March meeting or perhaps not until June.) Investors threw a temper tantrum in the last quarter of the year, hoping that the Fed would keep the easy money spigots open. Chairman Jerome Powell and Co. were not persuaded by the selling, nor were they moved by presidential tweets.
The Fed does not control longerterm interest rates -- those move based on supply and demand -- and are measured by the yield of the 10year Treasury note, which ended 2018 at 2.683 percent, down from an intra-year high of nearly 3.25 percent, but up from 2.409 percent a year ago. The increase pushed up 30-year mortgage rates from 4 percent at the start of the year to 4.6 percent by year-end.
3) What’s next for trade wars? The 90-day trade time out between the U.S. and China will run out at the end of February, which is why investors were happy to see President Trump’s Dec. 29 tweet reporting “big progress” in the talks. Analysts at Capital Economics note, “Although this (trade war) will have a negative effect on some sectors and markets, the consequences for global economic growth should be modest.”
4) Do we still have to think about Brexit? Negotiations over the U.K.’s withdrawal from the European Union could keep jittery investors on edge throughout the first quarter of 2019, as the official Brexit date of March 29 quickly approaches. The process has restarted, with a House of Commons vote scheduled for this week.
5) Will U.S. stock market indexes continue to slide? Nobody knows the answer to this one, but by now you have read the headlines: It was the nastiest December since 1931 for the S&P 500 and Dow Jones Industrial Average, contributing to the worst annual performance for U.S. stocks since the 2008 financial crisis.
Before you panic, remember that stocks have fared pretty well over the past 9.5 years and most investors have diversified portfolios, which means that they are likely down less than the headlines proclaim. Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected] jillonmoney.com. Check her website at www.jillonmoney.com