January 1, 2019
As we bid goodbye to 2018, the economy remains in a growth mode, and the long bullish trend for the stock market still appears intact despite December declines. The economic expansion that took hold starting in early 2009 has been characterized by mild inflation and extraordinarily low interest rates. The central bank has signaled its intention to boost interest rates perhaps two more times in 2019 in an effort to raise them to more normalized levels. The fear is that the economy may already be slowing and increasing rates too high would be a mistake by unnecessarily causing it to slow further. This anxiety may be misplaced, and many are not forecasting a recession next year.
One of the brightest aspects to this economic cycle is that the nation's unemployment rate continues to decline, and job growth remains on a healthy pace. This put consumers in a mood to spend, with holiday-season retail sales jumping a solid 5 percent over the same period last year, according to a post-Christmas tally by MasterCard.
Falling oil prices could keep inflation at bay and help Americans save money at the pump. That could give a boost to consumer spending in the coming year. If the lengthy economic expansion finally comes to an end soon, it could be signaled by an inverted yield curve. This term describes a situation where short-term yields exceed long-term yields for the same type of bond – for example, Treasury notes with two-year maturities paying more than Treasuries coming due in 20 or 30 years.
Although Trump managed a rewrite of the North American Free Trade Agreement (NAFTA) with Canada and Mexico and put other nations on notice that the U.S. wants better terms, trade disputes with China mostly have not been ironed out. There is no assurance they will be resolved despite a current cooling-off period. Continuing turmoil on this issue could send bouts of tension through the stock market and crimp economic growth. Conversely, any surprise, enforceable agreements could be viewed as highly beneficial.
When all is said and done, stock prices usually appreciate if corporate earnings improve. Profits have been on an upward trend for nearly a decade, getting a jump-start one year ago from passage of federal tax reform, which not only put more money in consumer pockets (by reducing individual tax rates) but also cut corporate tax expenses.
Stock prices have declined sharply compared to their September peaks. The question now is whether those lower valuations accurately reflect the current, more subdued, profit outlook.
Year to date the Dow, S&P 500 and NASDAQ is down 5.63, 6.24 and 3.88 percent, respectively, while the 10-year Treasury is yielding 2.69 percent.
*Disclaimer: This report is a publication of Marchand Faries Financial Management, Inc. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgement of the author as of the date of publication and are subject to change.