Big ques­tions to con­sider this year

The Times Herald (Norristown, PA) - - NEWS -

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

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