We hope everyone’s new year is off to a good start. Please join us as we bid a “not so fond” farewell to 2018. More specifically, let’s say “Good riddance!” to the last three and a half months of 2018. Not since the Great Depression has there been a worse December for stock market performance. Ironically, this is coming on the heels of all-time market highs just 90 or so days earlier. What a wild and unpredictable year it was.
Speaking of predictions, many of our readers know that we love to take some educated guesses for each upcoming year. Before we look ahead, lets review how our predictions turned out for 2018:
1. Strong global growth and the effects of tax reform would fuel markets for the 1st and 2nd quarters. We would also have the threat of an inverted yield curve that would create market volatility for the back half of 2018. Comment: While we called this correctly, we did not, however, expect the extreme market volatility we experienced during the final 45 days of the trading year.
2. Geopolitics shift from North Korea to Trade, Brexit and Syria. Kim Jung Un seems like a faded memory as political focus shifted to trade deals with China, Canada and Mexico. Comment: Again, we were all over this one as well, but the damage done to equity markets due to tariffs and stalled trade negotiations had a much greater negative impact than expected.
3. The Fed would hike rates 3 times. Comment: We missed this one. Had the Fed stopped at 3 rate hikes, it might have prevented the market from fearing that it would raise rates until it caused a recession.
So, there were our predictions for last year. It looks like we were batting about 66% for the year with our overall themes. But as we previously stated, the negative 9% slide in December definitely caught us by surprise. This down move bucked a long-standing historical trend that in similar mid-term election years which 2018 was one, we would have seen market rally not decline over the same period. Only since the beginning of 2019 have we seen markets behave in a more “expected” fashion.
So, what do we think is in store for 2019? We believe that that the major market influencers will be two-fold. They are Geopolitics and the Federal Reserve. And we will be paying close attention to both. With “Geo” and the Fed as the set-up and yes, we know it sounds like the title for a new sitcom, here are our three guesses for the upcoming year.
1. Brexit gets a redux. It appears that at the time of this writing Teresa May’s Brexit plan is doomed to fail in the British Parliament and that she will most like face a no confidence vote brought on by her political opposition. By not receiving the necessary vote to continue the Brexit process, we think the British Government will take steps to hold a second referendum vote, and this time the vote will be to stay, not leave the EU. This will actually be a welcome sign for the EU, and Europe will get back to business as usual. This will be positive for equities in general.
2. In an effort to reinvigorate European economic growth, ECB President Mario Draghi will take the “necessary steps” and the ECB will expand its purchases of government securities, effectively easing rates and providing economic stimulus. This will push international equities higher for 2019. For Emerging Markets, we believe that the US and China will find common ground on trade and reach a consensus that will see the US and China roll back the recent tariffs. China will take other steps to boast its own economy to stave off slower growth. Markets will see both the ECB and Chinese actions as favorable, setting up a scenario where international markets outperform the US.
3. The Fed will make one hike in 2019. Learning from their missteps during the 4th quarter of 2018, the Fed will work to better communicate with market participants, especially that it is not on a pre-set course. We expect the Fed to pause until its September meeting, when it will make its one rate hike for the year, after seeing equity markets recover (see prediction 1 and 2) off the recent lows.
Well, there are our guesses for 2019. While we believe that we will continue to experience market volatility, we are not looking for a significant or protracted downturn. We certainly do not believe that a recession is looming for 2019. We think that the above geopolitical events as well as improved Fed “speak” will slowly work themselves out favorably for market participants. One thing is for sure: these two areas certainly have our attention. Let us know if you have any thoughts or questions.