Market Predictions For The New Year

January 10, 2019

“Predictable” isn’t a word you would use to describe financial markets in 2018. No one could have foreseen the nearly unprecedented volatility in the U.S. stock market during December, a mere two months after the S&P 500 hit an all-time high.

Likewise, how quickly the U.S.-China trade war began and then escalated is something that would have been difficult for anyone to predict.

That said, certain other things that happened last year were less surprising. Interest rates increased, as many, including myself, thought they might. Additionally, the pace of ETF inflows slowed last year—not a surprise after 2017’s barnburner.

When all was said and done, three of the six predictions I made for 2018 proved correct. That’s certainly not a percentage I’ll be gloating over, but it’s also not going to stop me from peering into my crystal ball again for 2019 predictions. So, without further ado, here they are, from most likely to least:

US Expansion Becomes Longest Ever

Fears of a U.S. economic slowdown and even a recession gripped financial markets during the last part of 2018, but an imminent downturn is unlikely, and there’s a good chance the world’s largest economy keeps humming along in 2019.

Consumer confidence remains strong, bolstered by the booming jobs market; businesses are in good shape following the 2017 tax cuts; and inflation is contained. There just doesn’t seem to be any brewing imbalances that could tip the U.S. into a recession organically this year.

Some type of shock emanating from overseas, like a hard Brexit or a major downturn in China (spurred by an escalation in the trade war)—both of which are avoidable—could push the economy over the edge. But barring that, the current U.S. expansion is likely to exceed 10 years in July, eclipsing the ’90s as the longest period of uninterrupted growth in American history.

S&P 500 Rallies

This prediction is essentially an extension of the previous one. If the U.S. economy escapes a recession, U.S. stocks are likely to rebound from their awful showing of last year, when the S&P 500 returned a loss of 4.4%. U.S. stock ETFs, including the Vanguard Total Stock Market ETF (VTI) and the SPDR S&P 500 ETF Trust (SPY), should end the year in the green.

Indeed, two-consecutive down years for the venerable index is extremely rare. It didn’t even happen during the financial crisis. The S&P 500 dropped 37% in 2008, only to rebound 26.5% the next year.

You’d have to go all the way back to the bursting of the dot-com bubble in the early 2000s to see multiple down years in a row, and before that, to the 1973-1974 period.

Fed Hikes Rates

A growing economy and rebounding stocks would let the Federal Reserve breathe a sigh of relief. The central bank has bravely maintained an optimistic outlook for growth in the face of tumultuous markets and harsh criticism from many market participants.

Even as traders have gone from pricing in multiple rate hikes in 2019 to pricing in potential cuts, the central bank has largely remained firm in its belief that economic growth will justify a further tightening of monetary policy.

Most recently, Fed Chairman Powell suggested the central bank will be patient with its moves, giving a nod to the volatile moves in stock and bond markets at the end of 2018. But there are no signs that the Fed is ready to completely capitulate and end this tightening cycle.

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