Investment Currents: Our Outlook For 2019
Girard’s Investment Committee, under the direction of Timothy Chubb, Chief Investment Officer, recently met to review and update key performance indicators in order to chart its strategy for the upcoming year. In 2019, the Committee expects to see the global economy grow above-trend, but moderate after a strong year in 2018. Pressures to our forecast include continued geopolitical friction between the U.S. and China, negative impacts from tariffs and tighter global central bank policies.
The following is the outlook in key areas as we head into 2019 which has the potential to be the tenth year of this economic expansion which would make it the longest expansion on record.
GLOBAL GDP: 3.20% – 3.40%
As we anticipated in previous reports, economic data has been softer towards the end of 2018. We expect the global economy to continue to grow this year, albeit at a slower pace than last year. This recent weakness was in part due to the impact of tariffs and trade tensions, but also due to global monetary policy responding to above-trend growth in the developed world. We expect to see other central banks take their foot off the gas in 2019 after many, many years of extremely accommodative monetary policy. These measures will keep growth in check, but we still expect reasonable gains worldwide.
U.S. GDP: 2.30% – 2.50%
U.S. GDP tracked much higher in 2018 as the impact of tax reform made its way through an economy long into its expansion since the lows in March 2009. We anticipate economic growth will shift a gear lower during 2019 as the initial rush of fiscal stimulus slows and trade tensions weigh on the minds of investors and business leaders. The U.S. economy should continue to see above-trend growth, despite slowing a bit, as the economy continues to improve through a very strong U.S. consumer who has seen strength from employment, growing wages and manageable inflation.
UNEMPLOYMENT: 3.30% – 3.60%
With an economy that is currently at or beyond full employment, we expect new monthly job gains to slow down which should be expected after such a long period of falling unemployment. The unemployment rate will creep lower throughout the year, but do not be spooked by a month or two when the rate ticks higher. This is common late in the cycle as the market is more sensitive to seasonal workers or climate impacts to employment. The dynamics in the labor participation rate will be interesting to watch as discouraged workers who were previously unemployed, but willing, are able to re-join the workforce to fill the record seven million current job openings. The jobless rate of 3.7% is the lowest since 1969 – 50 years ago!
INFLATION: CORE PCE 1.70% – 2.10%
We believe inflation will remain tame again in 2019 thanks to exciting new technology disrupting many industries in addition to secular pressures of globalization. Low unemployment does bring wage pressure which will continue to be a tailwind for inflation. Tariffs may temporarily cause inflation to look higher, but increased prices tend to reduce demand longer term. In our view, this is a risk to the Federal Funds forecast.
FEDERAL FUNDS RATE: 2.75% – 3.00%
The Federal Reserve, led by Chairman Jerome Powell, raised rates in December for the fourth time in 2018, signaling that the economy is healthy enough to withstand higher rates. A stronger economy, improving labor market and increasing wage growth support the case for rates to continue to move higher in 2019. However, the Federal funds rate is nearing the “neutral rate” where gross domestic product is growing at trend and inflation is stable. We expect one to two rate increases this year.
U.S. DOLLAR: NEUTRAL
The U.S. dollar strengthened in 2018 as U.S. economic growth outpaced many other developed countries and forced the Federal Reserve to raise rates. This appreciation was more than we expected as geopolitical friction added an extra jolt undermining our outlook. As the Fed pauses in early 2019, and other economies improve, the dollar should remain neutral this year or even weaken, should the U.S. and China cooperate on trade.
CORPORATE EARNINGS: 6% – 8%
Corporate earnings growth clocked in at more than 20% for the full year in 2018, and more than 12% for the fourth quarter. Estimates drifted higher all year as benefits of a strong domestic economy and tax reform dropped to the bottom line. In 2019, we expect earnings growth to decelerate to a more reasonable range of 6-8%. Revenue growth will clip 5% with all eleven sectors in the S&P 500 expected to post top line growth. Despite rising input costs, profit margins could break records in 2019 as they close in on 12%. A weaker dollar, de-escalating trade strain and falling oil prices all present potential tailwinds for earnings growth to drift higher throughout the year.
INTEREST RATES 10-YEAR U.S. TREASURY: 3.00% – 3.50%
Long-term interest rates move based on the prospects of economic growth, consumption, and inflation. In addition to raising short-term rates, the Federal Reserve will also focus their efforts on trimming down the $4 trillion balance sheet after the multiple iterations of bond buying in the last decade. The impact from unwinding this balance sheet has been subtle thus far, but will accelerate from $380 billion in 2018 to $460 billion in 2019. Fortunately, we view this quantitative tightening as being priced into the market.
Every forecast is predicated on the information currently available and subject to the risk of unforeseen events, and ours is no exception. Our outlook is positive as we expect the global economy to continue to expand, inflation to remain stable, and the unemployment rate to continue to fall. The forecast also is based on key assumptions including a longer pause from the Federal Reserve raising raises and a cease fire or trade deal between the United States and China.
Last year, we noted that the greatest risk for investors would be overreacting to expected volatility after a record breaking 2017. Equity markets certainly delivered on that promise in the last few months of 2018. While stocks thrashed about, we remained committed to our view that the economy is not falling into an outright recession, but rather announcing the reality that we are in the later stages of this economic cycle.
If you have questions regarding this outlook or your specific financial needs, please contact your advisor. On behalf of the team at Girard, we wish you a happy and healthy New Year!
This document contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements address our reasonable expected and anticipated outlook for various aspects of the economy and markets. Such statements are based on the Investment Committees beliefs as well as assumptions made by and information currently available to the Investment Committee. Statements are subject to risk and uncertainties, which could cause actual results to differ materially from those anticipated. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.