Investing in the new year: What’s ahead

Stock market projections 2019

Key Points

  • Ameriprise Chief Market Strategist David Joy shares his outlook on the 2019 market and economic landscape.
  • U.S. economic growth and corporate earnings are forecast to remain strong, but growth could slow during the year.
  • Diversification of your investments and working with your advisor continue to play a critical role in achieving your goals. 

What can we anticipate in the stock market in 2019?

Each new year brings its own unique set of challenges for investors, and 2019 promises to be no exception. The primary questions for 2019 are:

  • Can the U.S. extend its current economic expansion, now the second longest in history?1
  • Can stock prices continue to rise in what is now the longest bull market in history?2
  • Will there be a favorable resolution to the ongoing trade dispute with China?

The answers to these questions strive to encourage a meaningful conversation between investors and their financial advisors to ensure that their investment portfolios are appropriately diversified and positioned for the year ahead.

What growth trends for the U.S. economy do you envision for the new year?

Largely due to fiscal stimulus, we forecast that economic growth in 2019 will be slightly better than it was in 2018, at approximately 2.4%. That said, we expect the quarterly pace of that growth to decelerate throughout 2019 as the impact of the stimulus begins to wane. Should the Federal Reserve continue raising interest rates (to help stem inflationary pressures), which we believe it is likely to do, that should contribute to a slowdown in the pace of economic growth. On balance, we believe growth will remain relatively strong in 2019, but become less robust over time.

What might be ahead for corporate earnings and what could it mean for investment portfolios?

If earnings are the lifeblood of equity prices, the forecast for next year presents its own uncertainties. Consistent with our outlook for the economy, we believe corporate earnings growth will once again be positive, but the pace of that growth is likely to slow in 2019. The risk to equity prices depends on the extent of that slowdown.

Consistent with our outlook for the economy, we believe corporate earnings growth will be positive, but the pace of that growth is likely to slow in 2019.

The current consensus expects 10% earnings growth next year, while some believe it could be significantly less. Risks to the outlook include:

  • Higher input costs (stemming in part from import tariffs) could make it more expensive for companies to deliver goods and services.
  • Rising labor costs, fueled by a five-decade low in unemployment, could erode profit margins.
  • Revenue growth overall could slow if, as forecast, global economic activity also slows.

What impacts could arise from further trade issues with China?

The U.S. continues to wrestle with China over what many consider to be unfair trade practices. While that policy stance has widespread support among the business community, the application of tariffs as a negotiating device could hold negative implications for the economy in terms of rising costs and supply-chain disruptions.

The longer tariffs remain in place, the more disruptive they become. Some companies have indicated they will raise prices to compensate, contributing to rising inflationary pressure. However, not every company has the same degree of pricing power and some may be forced to absorb those higher costs, thereby hurting their profit margins.

What happens overseas next year will help drive market performance, particularly among countries for which international trade is important. The International Monetary Fund recently lowered its 2019 global growth projection, citing trade tensions as a headwind. We are watching carefully how China responds to its own moderating economic growth. Politics within the European Union remain a source of uncertainty as well, as the March deadline for Brexit is fast approaching and Italy’s fiscal condition remains unclear.

What should investors consider discussing with their financial advisors?

Overall, as we approach 2019 there remains sufficient momentum to deliver what we believe will be decent, but moderating growth in both economic activity and corporate earnings.

At the same time, financial conditions are slowly becoming less favorable as global monetary policy becomes less accommodative as central banks become less willing to boost the economy through cheaper borrowing costs. There is still little evidence of inflation, but bond yields have risen in response to central bank policy and could rise further.

It appears that the year ahead will be one in which diversification — both by asset class and geography — will be increasingly important, as capital market returns may become less robust over time. In your next meeting with your financial advisor, you may want to consider reassessing your current portfolio mix in light of your risk tolerance and discuss ways to adjust investment allocations to support your goals.