Thoughts On The Outlook For 2019

David R. Guttery, RFC, RFS, CAM

Volatility never really goes away.  Indeed, the 15 months between November of 2016 and February of last year were unique in that volatility was largely absent, but over time, such is a constant of the market.  As we’ve discussed in prior articles, markets are simply discounting mechanisms.  They constantly re-price risk as the landscape changes.  Don’t confuse discounting with forecasting however.  The markets don’t have a stellar track record when it comes to predicting the future.  They aren’t forecasting mechanisms, but rather discounting mechanisms.

 The cause of volatility in 2018 was largely related to imposed tariffs by the US, and retaliatory tariffs by other countries.  The markets priced into themselves the risk of such evolving into a global trade war, and the impact such might have upon previous assumptions of economic growth.  Other concerns were related to Brexit, and the unwillingness of Republicans and Democrats to compromise on spending measures that resulted in a government shutdown.  Certainly, the markets focused upon the Federal Reserve, and discounted the impact of current and future monetary policy into its assumptions about economic growth.

 Yes, I believe that volatility will persist throughout 2019, but hopefully with fewer cathartic swings.  Markets move on perception and fear sometimes, and over the long term, they’re generally driven by what can be quantified.  The quantifiable economic data looks about as strong as I’ve seen it over the duration of my 28 year career.  The good news is that if were to suddenly find ourselves with a trade agreement with China, or a resolution to the government shutdown, or if what’s been known of Brexit since 2016 remains intact, or if Chairman Powell reassures the markets that the Fed remains measured, and data driven, then this correction, induced largely by fear, could resolve sharply as well.

 Concern over the sustainability of corporate profits also contributed to the slew of concerns that worried the market in the last quarter of 2018.  Haver Analytics and other sources offer historical evidence of corporate earnings and the current trends just don’t support the recent skepticism.  From the fourth quarter of 2005 through the third quarter of 2008, we noticed a gradually deteriorating pattern in corporate profits.  We see no such pattern evolving today. 

 Indeed, we see 7.1 million unfilled skilled labor jobs, and companies spending a lot of money to train people to fill those jobs, because consumerism remains strong, and companies must expand their capacity to meet increasing demand that isn’t slowing down.  In the face of such spreadsheet evidence, on the 3rd of January anyway, I can’t see any reason to believe that recent patterns of corporate profitability should change.

 The mainstream media spared no opportunity to float the recession concern in the previous quarter.  In my opinion, the chances of a recession in 2019 are about as great as Birmingham seeing snow in July.  The elements just aren’t there.  That doesn’t mean that geopolitical risks can’t suddenly alter that equation, but based on what I can quantify on a spreadsheet today, you just don’t get a recession when the economy meets the definition of being at full employment, and the 4 week moving jobless claims average is just off an October 1968 low, and the ISM manufacturing and non manufacturing index values are right around 60, and non defense capital goods spending is this strong, factory orders and new orders are this strong, and the housing market is this strong, and the leading economic indicators are this strong. 

 The October and November consumer confidence readings were the highest seen since the end of the last recession.  We just experienced the best Black Friday and Cyber Monday in history, and the Redbook retail sales data in December was historically strong.  Confident consumers spend money, and we can quantify the degree by which they’ve done so.  Consumerism is 70% of GDP, and we just saw the first 12 month period of time since 2005 where GDP grew by more than 3%.  None of this data is consistent with an economy tipping over into recession.  So yes, that fear has been overly priced into the discount of the stock market.

 So, what should investors do during periods of fear such as this?  First, review and reflect upon your objective, and the time between now and the realization of that objective.  If you remain with a long period of time between now and then, remain true to the plans that you’ve put into place.  Secondly, have the intestinal fortitude to make such periods of volatility work for you.  Invest through the lows, into your 401k and other plans.  By doing so, you purchase greater numbers of shares with static monthly investments, and over time, such dollar cost averaging will reward persistent and patient investors.

 Those of my clients without long holding periods, or who are near, or into retirement and focused upon the production of income, have allocations without a large exposure to risk assets, and they’re generally weathering this period in good shape.  Everything is driven by your objective and tolerance for risk. 

 Markets worry.  Sometimes, it’s a full on panic, but my job is to remain dispassionate and advise clients accordingly.  Right now, we have an abundance of “what if” induced panic, and an abundance of strong quantifiable data.  Remain focused upon your objective, rise above the “what if” and be driven by the quantifiable.

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