2018 has been a year of highs and lows, and a particularly gyrating stock market (that I have likened to a roller-coaster ride in earlier blogs). Of particular note, is the effects of the Tax Cuts and Jobs Act, passed by Congress in late 2017, and signed by President Trump on 22 December 2017. What should investors and other interested parties expect in 2019? Let’s review what happened in 2018, and then project what we should expect to occur in 2019.
2018 in summary:
Inflation: Consumer prices from December 2017 through November 2018 went up 2.2%, per the Bureau of Labor Statistics (BLS) website. This has been a source of debate and concern by the Fed and most economists, due to the strength of the economy and the near record low unemployment rate (see Business below). The question is: why is inflation so low when the economy is so strong?
Stock Market: We saw all-time highs for the indexes this year – the Dow in early October, and the S&P in late September, while the NASDAQ peaked in August; however, the last quarter of 2018 was not kind to investors, as all three indexes fell by 18% or more (the NASDAQ is in Bear Market territory, with a 23.6% loss). The obvious driver of the index’s gains were the effects of the Tax Cuts and Jobs Act, enacted at the end of 2017. What isn’t obvious is the driver for the market’s recent decline, but it has been attributed by some to lower economic expectations and a possible recession expected in 2019.
Real Estate: Residential real estate was challenged this year by increases in the interest rate by the Federal Reserve, which have driven mortgage interest rates close to 5%. However, prices are still rising in most housing markets across the country, with only three states seeing price declines. This is being driven by low inventories of available supply, in both new home and existing home sales (supply and demand). Nationally, the average year-over-year increase in prices is almost 5%.
Business: In terms of Gross Domestic Product (GDP), the economy was driven (some might say “supercharged”) by the tax cut. Although first quarter GDP was only 2.1%, it was the highest first quarter value since 2015. Second quarter GDP was a whopping 4.2%, the highest GDP number since 2014. Third quarter GDP was 3.4% (adjusted), and fourth quarter GDP is also expected to be more than 3%. This would average to over 3% for the year, the first time that has happened since 2005. Unemployment in 2018 was near a 50-year low, at 3.9%.
Inflation: I expect inflation to continue to grow, above the 2% target set by the Fed. There are multiple factors influencing consumer prices: 1) the continued trade wars between the US and other countries (especially China), 2) the “trickle down” effect of new trade agreements recently established (including USMCA, which is replacing NAFTA), and 3) the momentum of wage increases and tariffs already in effect, which have not yet been transmuted into product pricing.
Stock Market: We have already seen the initial stages of a bear market in stocks, regardless of the recent “bounce” after Christmas. I expect this general downward trend to continue for a short period, to be followed by the inevitable rally which will lead some to think the worst is over. If you are not already out of the market, the next rally may be a good opportunity to sell, especially if your time horizon (when you will need those funds) is short. If your time horizon is especially long, you may be able to “ride it out” to the other side of this troubled market. Discuss these options with your broker or financial advisor, as everyone’s financial situation is unique.
Real Estate: I still believe real estate will be the best protection against the dual challenges of increasing inflation, and a stock market correction or bear market. As I have stated in other blogs on this website, money always seeks the highest returns, and when real estate is the only game in town (due to the stock market being down), it will again become the darling of the investment community.
Business: I had previously stated that I expected a recession in 2018. That did not happen. Instead, what happened was the Tax Cuts and Jobs Act (TCJA). As I stated above, the TCJA “supercharged” the economy in 2018, and delayed the coming recession. The business cycle cannot be averted, and eventually it will come full circle. I, along with a majority of business leaders, now expect a recession by the end of 2019. Even the Federal Reserve is projecting a downturn by 2020.