2019 Investment Outlook

By Mitchell J. Smilowitz, CPA

As the current economic expansion approaches its 10th year, cracks are beginning to show. Growth is slowing. Interest rates are rising. Volatility has returned to financial markets. Given these trends, what are the prospects for 2019?

To answer that question, the JRB looked at predictions being made by Fidelity, Goldman Sachs, T. Rowe Price and Vanguard, four of the investment managers whose funds we offer. While all predict a slowdown in growth during 2019, none predict a recession.

In 2019 Outlook: Maturing Cycle Heightens Uncertainty, Fidelity argues that global growth has passed its peak. While growth will remain positive, it will become more uneven. The U.S. and Chinese economies are already slowing. While both economies will continue to grow in 2019, the 10-year boom may be coming to an end. Rising interest rates and trade tensions will exacerbate the economic slowdown. American corporations should remain profitable, but earnings growth is likely to decline in the face of slower global growth, lower oil prices, a stronger dollar and the fading impact of the 2018 tax cuts. This will result in continued volatility in investment markets. U.S. trade policies will remain a source of uncertainty which is likely to create an upward pressure on inflation and downward pressure on profits. Fidelity suggests that investors respond with a time-tested principle – a diversified portfolio.

Goldman Sachs
According to the Goldman Sachs 2019 Outlook: The Home Stretch, growth in the U.S. economy is likely to slow in 2019 (from 3.50% in 2018 to an estimated 1.75%). Higher interest rates and the fading fiscal stimulus will drive the slowdown in growth. They expect the Fed to raise interest rates to 3.25% - 3.50% during 2019. Unemployment is projected to fall to 3.00% by early 2020. Wage growth should reach 3.25% - 3.50% with core inflation of 2.25%. Goldman Sachs analysts believe that the typical roots of recessions in the U.S., an overheating economy or financial imbalances, are likely to increase in 2019. Despite this, they believe that the risk of recession is low and that the current expansion is on track to become the longest in U.S. history in 2019.

T. Rowe Price
T. Rowe Price’s 2019 Global Market Outlook, Disruptive Forces Seen Shaping 2019 Investment Landscape, concludes that a global recession is unlikely in 2019. There will nonetheless be several areas of disruption that are likely to result in slower growth worldwide. These include diverging monetary policies around the globe (with the Fed continuing to increase interest rates), disruption from technology and geopolitical uncertainty (trade disputes between the U.S. and China, a chaotic Brexit and fiscal disagreements between Italy and the EU). We are likely to see continued high volatility in the financial markets.

The Vanguard Investment Strategy Group recently issued Vanguard Economic and Market Outlook for 2019: Down But Not Out. Vanguard analysts do not see core inflation rising significantly in 2019 despite the likelihood of declining unemployment and higher wages. They expect the Federal Reserve to continue raising short-term interest rates to 2.75% - 3.00% in 2019. At that point, Vanguard believes that stable inflation and slowing growth will convince the Fed to stop raising rates. While the report’s authors believe a recession is unlikely, they believe that rising interest rates and the threat of inflation will translate to continued volatility in financial markets and the potential for lower long-term investment returns. Like Fidelity, Vanguard advises investors to prioritize portfolio diversification in 2019.

Of course, no one can predict the future. We can evaluate how current trends may play out going forward, but, as each of these reviews makes clear, many uncertainties remain. As long-term investors, how should we respond?

While it is useful to understand what the next year may bring, it is critical to keep a 5 - 10 year perspective. What are your goals? Are you on track to meet them? Is your portfolio structured appropriately? As we’ve seen in this 2019 economic review, diversification is key.

If you’re not certain how to answer these questions, please contact the JRB at 888-JRB FREE (572-3733). We can help you understand the extent to which your portfolio can withstand the challenges it may face in 2019.