Investment Currents: Updated Outlook for Q2 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 this year. In 2019, the Committee expects to see the global economy grow near the “new normal” trend, continuing to slow 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 U.S. central bank policies.
The following is the outlook in key areas as we head into the second quarter of the year, which will likely ring in a historic event – this June the U.S. economy will record 120 months of economic expansion which will tie the record set from March 1991 to March 2001 – the longest expansion on record.
GLOBAL GDP: 3.20% – 3.50%
As we anticipated in previous reports, economic data trended lower in late 2018 and continued in early 2019. 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. In the first quarter, investors saw global central banks take their foot off the gas after nearly a decade of accommodative monetary policy. This newly found “dovish” stance has recently injected renewed optimism into the economy as shown by various global economic indicators, however, we have revised growth expectations lower based upon expected performance in the first quarter.
U.S. GDP: 2.10% – 2.40%
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 geopolitics weigh on the minds of investors and business leaders. The U.S. economy should see growth moderate to trend, despite slowing a bit, as the economy continues to grow through a very strong U.S. consumer who has seen strength from employment, growing wages and manageable inflation. Our Investment Committee does not anticipate a recession this calendar year.
UNEMPLOYMENT: 3.50% – 3.80%
With an economy that is currently beyond “full employment,” we expect new monthly job gains to slow which should be expected after such a long period of employment gains. The unemployment rate will tiptoe lower this 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 current jobless rate is 3.8%.
INFLATION: CORE PCE 1.70% – 2.00%
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. The Committee has revised this range to a lower, tighter band to reflect economic data released and recent views of the Federal Open Market Committee (FOMC).
FEDERAL FUNDS RATE: 2.25% – 2.75%
The Federal Reserve, led by Chairman Jerome Powell, did not raise interest rates this quarter after raising rates four times in 2018. Powell signaled that the economy is healthy, but economic growth or inflation are not strong enough to warrant further policy tightening at this time. The FOMC also removed the possibility for raising rates for the remainder of this year and are only forecasting one rate hike in 2020. This is a clear indication that the FOMC views the Federal funds rate very near or already at the “neutral rate.” The neutral rate is where gross domestic product is growing at trend and inflation is stable. We are revising our forecast lower to reflect zero to one rate hike later 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: 3.00% – 5.00%
Corporate earnings growth clocked in at more than 20% for the full year in 2018 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 3-5%, slightly lower than our previous estimate. Revenue growth will clip 5% with all eleven sectors in the S&P 500 expected to post top line growth. Rising costs, such as labor, will pressure profit growth. 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: 2.50% – 3.00%
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 has also focused their efforts on trimming down the $4.5 trillion balance sheet after the multiple iterations of bond buying in the last decade. The FOMC announced in March that it is expected this “unwind” will conclude in September 2019. As a result of this news and slower growth, our expectation for bond yields has been revised lower.
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.
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.
These articles and reports are for general information purposes only and are not intended to provide legal, tax, accounting or financial advice. The information in these articles or reports, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.