January 2019 – 3 in 3
This month, Jason Weaver discusses a 2019 Market Outlook. He discusses 2019 positives, some challenges and key catalysts. If you would like to subscribe to our monthly 3 in 3 videos, visit our YouTube channel below. At Weaver Consulting Group we’ve come to know through our clients that they like to stay informed about the economy and markets, which is why we’ve come up with “3 in 3.”
Our growth expectations are reasonably well. We’re looking at about 5-6% earnings growth, about 2.3-2.5% GDP growth, 3.7% global growth and 2.4% consumer spending growth. We’re also expecting the unemployment rate to fall to 3.5%. We have reasonable valuations in the S&P 500, trading about 16-16.5%. We’re also looking at inflation expectations moderating. That should help gasoline prices, food and housing. That should offset other factors as well.
The S&P 500 2019 Forecast is pretty wide, from Wells Fargo’s 2665 valuation all the way to Credit Suisse 2925 valuation.
The first challenge is our trading partners. China, UK, Mexico and Canada are all slowing. We are also starting to see the peak of some economic numbers in GDP, inflation, jobs, housing and consumer confidence. As you think about companies as they report earnings, if wages and inflation are going up with rising interest rates, you’re going to see some margin compression.
Credit spreads are particularly going to hurt you if you are have a low credit quality company. What happens is the cost of borrowing money goes up. We call that a credit spread.
There is uncertainty in tariffs and volatility with the current administration and day to day flux of communication. We’re expecting a lot of volatility in 2019, based on the 2018 volatility index (VIX). We started 2018 very calm, saw a big spike in the first correction of the year, then things came back down. The stock market was good and then in October 2018, when the fear index spiked, we saw the first start of our correction. It started to calm down, then we saw the real peak of volatility in December 2018.
The current volatility index is 50% less than the peak on December 24, 2018. So the stock market is actually starting to do a little bit better.
These are important because the range of earnings growth could be as low as the 5-6% (the median) all the way up to 15%. Therefore, we need certain things to happen for things to be better than those expectations. There are trade tensions and international political uncertainty. We’ve got domestic uncertainty with gridlock and the government shutdown. But we are seeing the positives of the tax cuts that are supposed to come in the first quarter, from last year’s benefits going through.
Just recently, we’ve seen the Fed. turn a little dovish, which has helped the stock market. If we start to see the Fed. go a little more hawkish and talk about raising interest rates, that’s going to create some uncertainty. Lastly, the market has only priced in one rate hike. So if we start to see 2 or 3 rate hikes from the Fed., that could potentially affect the stock market projections.
As we look in to 2019, stay tuned with us because it’s going to be quite volatile but we’re her for you.