Market & Economic Outlook | January 2019

by | Jan 15, 2019 | Newsletters

 

We separate the relevant from the noise, to bring you market updates that helps you on the path to and through retirement! 

 STATE OF THE MARKETS

State of the Markets (S&P 500 +3.57% YTD through 1/13/2019) 

Stocks were hammered during the last quarter of 2018 – down 14.3% from October through December. Slower global growth, rising interest rates, and trade tensions with China are raising concerns about a possible recession.

While the risk of a recession is real, we just don’t see strong indications that a recession is at hand. In fact, if you look at the fundamentals of the economy and the business climate, the stock market’s dismal performance in late 2018 is surprising.

Consider the following indicators of continued growth:

  • The Atlanta Fed is projecting 4th quarter 2018 GDP growth of 2.6%
  • The jobless rate reached a 49-year low in 2018, and wages continued to grow in 2018
  • Tax cuts helped spark business investment and consumer spending
  • Inflation remained low at 1.8% as of the November 2018 estimate of Headline PCE
  • Corporate profits surged, with 3rd quarter earnings of the S&P 500 up 32.9% year-over-year
  • American consumers spent a lot over the holidays – $850 billion – climbing 5.1% in 2018
  • Auto sales had the best four-year run ever, with total sales of 17.3 million vehicles in 2018, up 1% from the prior year

With the market officially hitting bear market territory (down more than 20% from the peak), it is the first time since 1987 that a bear market has occurred in the absence of a recession. Back in 1987 when the market dropped 22% in one day, it created one of the best buying opportunities in a generation. We think opportunities exist today for bargain hunters to take advantage of the recent drop in the market.

Despite the positive fundamentals in the economy, investors are scared. Lipper recently reported equity mutual fund outflows for the 26th consecutive week. In other words, investors have been pulling money out of stocks for the last 6 months. Net outflows tend to coincide with buying opportunities, so we view this as a positive sign.                                                   

ECONOMIC UPDATE

We continue to believe the economy will grow 2%-2.5% in 2019 and that corporate earnings will slow down but will continue to grow in the high single-digit range.

The linchpin for the economy in 2019 will likely be trade negotiations with China. As we write this newsletter, the U.S. and China wrapped up trade talks in Beijing. Both sides are highly motivated for progress on trade negotiations, so we think talks will be successful, providing a boost to stocks.

We’ll also be keeping a close eye on the Fed in 2019. On January 4, 2019, Fed Chair Powell said, “with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.” This indicates that the Fed may take a “wait and see” attitude when it comes to raising rates in 2019.

INVESTMENT THEMES

In addition to opportunities that exist broadly in this beaten down stock market, there are several areas that we are emphasizing in client portfolios:

  1. Increasing Dividend Stocks

A perennial favorite of ours here at True North, dividend stocks are often a safe-haven in difficult markets. Companies who consistently raise their dividends year after year have tended to hold up better in down markets compared to growth stocks or non-dividend payers.

Increasing dividend stocks provide a growing stream of income, current yields that in many cases exceed comparable treasury bonds, and the income stream acts as a potential inflation hedge

  1. Value Stocks

Value stocks are companies that trade at discounts to their intrinsic value. In essence, the goal is to find “great companies” that are trading at bargain prices.

In recent years growth stocks have outperformed value stocks with many investors chasing the high growth momentum stocks and big technology companies. This has left many value stocks unloved in the trash heap.

Moreover, in the 90 years from 1926-2016, value stocks outperformed growth – 13.5% annually vs. 9.2%. That’s significant long-term outperformance and a good reason to consider value investing!

  1. Shorter-term bonds and higher money market yields

Bonds looked poised to tread water in 2019, with the Fed expected to continue to raise interest rates, albeit at a slower pace compared to 2018.

The good news is that bond investors are now able to earn higher yields on their bond portfolios, with 1-year CDs paying 2.8% and high quality, investment grade 5-year corporate bonds yielding around 4%.

Since money markets are now paying more attractive yields – around 2%, we still favor higher cash holdings and shorter maturities (5 years or less).

Bottom Line

Despite all the pessimism, we are still positive about stocks, bonds, and the economy in 2019. If the current economic expansion lasts until June 2019, it will be the longest expansion in U.S. history. Unless trade tensions with China escalate into a full-blown trade war, we expect that the economy will reach this historic benchmark and the stock market will continue to march forward.


 

 

Friday, January 4th, we celebrated True North’s 1st Birthday! Hard to believe it’s been a year since we first opened our doors. Looking forward to another amazing year of being able to do what we love, help our clients reach their goals!

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ABOUT THE AUTHOR

David Wilson
DAVID G. WILSON, JR., MBA

David specializes in working with families and business owners as their personal “CFO” by creating and implementing a financial roadmap designed to help them pursue their goals. He is proud that he still works with clients from the very start of his career (in 1982!).

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