What Should We Expect in 2019?

From another 3+% wage growth, Trump’s comment on the timeline of the US-China trade war, and Powell’s speech on a relaxed Fed rate hike – 2019 does not seem to be overly bearish as it initially seemed. It is difficult to predict what 2019 holds for the market but I expect the continued volatility as already being seen over the past few months. With a recent inversion in the yield curve (short term interest rates being higher than long term rates) occurring for the first time since June 2007 and a predicted slowdown in corporate earnings, I would expect another bear market and possibly a recession sometime soon. In the face of uncertainty it is imperative to properly diversify your income sources so that you are well prepared for a downturn. Below are some major topics to look forward to throughout 2019.


Another Fed Rate Hike
The federal funds rate which is the interest rate banks lend money to each other has been steadily increasing over the past few years. Below is a time-series plot of the fed funds rate over the past 47 years. The rate was kept at zero between 2008 and 2015 during the recession. Recently, we have had 4 quarter point hikes in 2018 and the federal reserve expects 2 rate hikes in 2019 to level off around 2.9% by year end.

Economy Slow down
The recent forecast released by the Federal Open Market Committee has the median US GDP growth rate decreasing from 3% in Year 2018 to 2.3% in Year 2019. The range of expected US GDP growth for 2019 is between 2.0% to 2.7%. The upper end of the range is lower than the median in 2018 so I expect that we will definitely see a decline in the GDP growth and a subsequent slow down in the US economy.
Trade War Resolution
2019 will mark the year when the US-China trade war will be resolved. The trade war has been ongoing since January 2018 when the first tariffs were imposed by Trump on foreign solar panels. Both the US and Chinese markets have felt the impact of the trade war as companies in both countries have seen a slowdown in revenue including Apple. The trade war has negatively impacted the equities market contributing to the S&P 500 entering bear market territory. A resolution with China is expected in 2019 and it should help boost the markets in the near term.
Weakened Corporate Earnings
With the recent revenue revision and cut for the fiscal 1Q2019 by Apple due to multiple factors including the deceleration in China’s economic growth, corporate earnings are expected to weaken across industries especially those with exposure to the Chinese market. Furthermore, you could make the case that the stock market is currently over-valued based on the popular Shiller PE Ratio which tracks the price of the S&P 500 relative to the earnings of the companies that make up that index. A regression to the mean of 16.59 might be due in the market and that represents an additional 40% decline in the price assuming earnings are unchanged. This is indeed concerning as that would suggest that if history repeats itself then we should expect an additional 30-40% decline in the near future and along with the recent inversion in the yield curve in December – we may indeed be headed for a recession within the next 2 years.

2019 IPOs
Similar to previous years, there will be some major initial public offerings on the stock exchange. Year 2019 will include the IPOs of some technology companies with multi-billion dollar valuations on the NASDAQ stock exchange. Popular rival companies – Uber and Lyft plan on going public in the first quarter of 2019 and it should be an exciting period for both companies as well as investors. Other IPOs expected in 2019 are Pinterest, Slack, Airbnb, Palantir, Rackspace, Robinhood, and Cloudfare. I am personally very interested in seeing how Uber fares as they are also heavily investing in the self-driving technology space.
5G Arrival and Robo-Taxis
The driver-less revolution will make its way to main street with companies such as Aphabet’s Waymo recently rolling out “Waymo One”, a commercial self-driving service and GM’s partnership with DoorDash to test a pilot autonomous food delivery service using self-driving cars in San Francisco 1Q2019. Technology will again be at the forefront of the fourth industrial revolution and this has the ability disrupt numerous industries. Imagine not having to pay for car loans, registration, inspections, repairs, parking, tolls, and power. The revolution could be a game-changer with huge benefits in the near future. The 5G revolution is also slated to arrive in 2019 with unprecedented download speeds. There is expected to be new phones produced that will have capabilities to take advantage of the extremely fast speed offered by 5G and consumers will have to adopt this new technology.
What does this mean for you?
2019 will be a year of increased volatility due to an expected slow down in the economy and highly priced stocks in the market. It is important to stay calm and plan ahead by eliminating debt (especially “bad debt”) and increasing savings throughout the year to properly position yourself to take advantage of bargain opportunities when they do present themselves.

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