Three Major Themes to Keep an Eye On
As we close the month of January, it is easy to forget what happened on Christmas Eve 2018. The stock market technically entered a Bear Market. The S&P 500 was down over 20% from its all-time high in September. What was going on to cause such a violent reaction in such a short time frame? There was a confluence of events, but the overall fear was created against a backdrop of slowing global growth and the notion that the Fed was not going to halt its rate increases even in the face of slowing growth. To understand where we are headed, we must look at 3 main driving events going forward: global and domestic growth and the effects of trade wars and trade tariffs, the Fed and their outlook and domestic political risks.
Over the last two Fed meetings, Chairman Powell has indicated a willingness to be more data dependent which is in stark opposition to what he had mentioned only months before. This, and this alone, was the driving factor for the markets 8.01% rise in the S&P 500 for the month of January. All sectors benefitted. What happens next, is the issue at hand. Many economists are predicting no more rate increases for 2019 and some have been so bold as to say that the Fed may actually lower rates. It is our opinion that these “guesstimates” are irrelevant for two reasons. First, the Fed said they will be more data dependent. So, unless you can tell the future, it is difficult to try and predict what the Fed will do at this point. Second, Powell has essentially told us that the Fed is in a neutral position or a wait and see mode. Unless the Fed makes a surprise move, it is our opinion that the Fed will be a nonevent for the rest of 2019.
Frankly, it is too early to call. The US economy is humming along. The EU is bogged down with debt and Brexit. China is beholden to the effects of the on-going trade war. It is our opinion that the Trump Administration will do everything in their power to settle this before it becomes a serious factor affecting global growth. China is feeling the most pain, but certain industries in the US are also being affected. Look to Apple’s abysmal results and outlook, citing China as a major cause. They were not the only company to feel the effect. As we approach the end of the year, politics will start to dominate the headlines. We think President Trump will not want his popularity to be adversely behind and will want to point to a big economic “win”, which would be “winning” the trade war with China. Overall, we feel this will be a good thing for the economy in the short run. In the long run, China may resort back to its old ways and become even more protectionist. So, for 2019, we see resolving this issue as a decent size plus, maybe worth as much as 10% in the stock market.
Domestic Political Issues / Wild Card
Some Democrats have been waiting for the opportunity to start impeachment processes on Trump since election day. The Democrats now have the power in the House to do that very thing. However, without substantial evidence of serious wrong doing or illegal activity, this is a waste of time. In our opinion, if the Democrats would act too quickly, it will surely backfire. We are of the opinion that Pelosi and Schumer are biding their time and waiting for the Mueller report. In the end, regardless of the report, the Senate will probably not have the stomach to move forward with an impeachment unless the Mueller report is so damning that they have no choice. We find it unlikely that the report will yield the necessary results, as there have not been any leaks of information that can tie Trump directly to the ongoing accusations. Leaks have become so common place, that it seems probable this information would have hit the press by now. We concede; however, this is a negative back drop. Regardless of outcome, the turmoil and distraction caused by the coming release of the Mueller report may very well keep the brakes on the market.
Having the January 8% cushion before actually writing this piece feels a bit like cheating. There was far too much volatility at the end of 2018 to be able to write a confident outlook for 2019 at the time. Given the three themes that we discussed; Fed – neutral, Global Growth – positive, and Domestic Political Risks – slight negative, it is our opinion that stocks will end the year around the level they are right now with the potential for 5% more growth. Valuations seem fair at current levels and the consumer is strong. All these things can change based on the three themes we discussed. A fair deal with China will potentially put us 5% above current levels, but may be strained with politics.