What to expect in 2019

By David Joy, Chief Market Strategist, Ameriprise Financial

 Investors can prepare for 2019 with our economic forecast

Key Points

  • Economic growth should continue, but the pace of growth may level off.
  • The direction of stock and bond markets remains uncertain.
  • Positioning your portfolio a bit more defensively may be prudent.

Each new year brings its own unique set of challenges for investors, and 2019 promises to be no exception. Can the U.S. extend its current economic expansion, now the second longest in history?1 Can stocks continue to rise in what is now the longest bull market in history?2 Should investors expect the trend of rising interest rates to persist? Will there be a favorable resolution to ongoing trade difficulties with China? These are the questions most investors have currently; here’s how we expect 2019 to unfold.

Economic growth: positive but modest

Given the challenges of an aging population and slow productivity growth, the ability of the U.S. economy to grow has moderated to approximately 2%, according to the Congressional Budget Office. However, due to an injection of fiscal stimulus (the tax-cut package passed in 2017), we anticipate that growth in 2019 may be slightly better, at approximately 2.4%. That said, we also expect that the quarterly pace of that growth will slow toward the end of the year, as the impact of the stimulus begins to wane. Should the Federal Reserve continue raising interest rates (to stem inflationary pressures), which we believe is likely, that would 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.

Stocks face challenging environment

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 quite healthy but may slow as the year unfolds. The risk to equity prices depends on the extent of that slowdown. The market’s current consensus expects 9% earnings growth next year,3 while some believe it could be significantly less. Some of the risks to the outlook include higher input costs for goods producers, stemming in part from import tariffs. With unemployment at a five-decade low, rising labor costs (wages) could erode profit margins. In addition, revenue growth overall could slow if, as forecast, global economic activity also slows. We believe all these factors represent potential concerns for the stock market in 2019.

Trade challenges contribute to uncertainty

The U.S. continues to wrestle with China over what many consider unfair trade practices. The two sides have agreed to a temporary cease fire while negotiations continue, but the outlook for meaningful progress remains uncertain. While a pushback may have widespread support among the business community, the application of tariffs as a negotiating device could hold negative implications for the economy. For example, a protracted dispute over trade could result in rising costs and supply chain disruptions.

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

Interest rates may continue to trend higher

Bond yields have risen modestly in response to the shift in monetary policy and continued economic growth. How much more yields are likely to rise next year will largely be a function of what the Fed does, and whether inflationary pressures begin to climb. This suggests that total returns from many fixed-income assets may be more modest in 2019. Beneficially, many shorter-term instruments now offer attractive yields for the first time in this recovery, and credit conditions remain generally healthy in light of the strong economy. This amounts to greater yield opportunities for investors even among some higher-rated, less risky fixed income investments.

What happens overseas next year will influence U.S. market performance, particularly among those countries for which trade with the U.S. is important. The International Monetary Fund has 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 (Great Britain’s departure from the European Union) is fast approaching and Italy’s fiscal condition remains unclear.

Diversification especially important

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. 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.

A discussion with your advisor about our outlook will help you determine how to position your investment portfolio for the year ahead and over the long run.