US Economy is now in the 10 year of expansion. Calendar year Q4 of 2018 was devastating for the stock market which have put market participants in a cautious mode. Everyone is convinced that ‘Recession’ is inevitable but the only question is ‘when’. Currently unemployment rate is at 49 year low. Wages have started rising in US. WTI Crude oil futures have declined 40 % from the peak in October 2018 now trading at $45 per barrel. Lower energy prices give more purchasing power for consumers. GDP estimates for next 2 quarters are not negative yet. Tax Cuts & Jobs Act which became law in 2017 lowered corporate income tax from 35 % to 21 % and most personal tax returns will likely result in higher refunds. Inflation reported by CPI is hovering less than 3 %. It is hard to make a case for an obvious ‘recession’ in 2019 given these +ve data points.
There will be interest rate hikes by FED in 2019. But depending on how fast FED hikes interest rates - Yield Curve can enter -ve zone very quickly. Once the curve inverts ‘recession’ is inevitable. Housing market is already signs of slow down primarily due to rising interest rates.
There are two certain phenomena for Markets (1) Markets never like uncertainties. Markets want predictability (2) Markets are always looking at short term (3-6 months). Even if there are very high changes of recession in 2020 or 2021 - markets do not care at this moment.
There are many theories as to why markets got hit badly in 2018 but most likely reason is the International trade war between US-China. However, in the larger interest of US - current administration is trying to fix the trade environment where China has been taking advantage for decades by dumping goods in US markets, stealing IP and encouraging discriminatory practices against US firms doing business in China. Even though trade wars create short term instability but if US succeeds to implement fair practices it will be good for US economy and US workers in long term.
Even though leading indicators do not point to a recession it doesn’t mean things cannot change suddenly. We still have to remain invested in something and cash is a position which I dislike. I am recommending exposure to large cap index funds like MGC or dividend heavy ETFs like VIG. I also like utilities ETF - VPU or XLU. If you want to add more risk for higher reward in 2019 portfolio consider "MJ".
Typically averaging returns over a long term is always a practical strategy. In 2019 - the maximum contribution limit in 401k was increased to $19000 - Make use of this opportunity and try to maximize savings in 401k.
Sectors or themes to stay away from in 2019 – Preferred Shares, Treasuries, Junk Bonds and Small Caps.
Comments