“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.
In fact, if the economy manages to weather this latest growth scare, it will likely lift the Fed funds rate again at least once. That will put upward pressure on short-term interest rates, such as the two-year Treasury yield. However, longer-term rates, like the 10- and 30-year, may not be as responsive to the Fed’s hikes.
If the Fed overtightens, the yield curve—especially the widely watched two- to 10-year part of the curve—could invert, igniting recession fears.
ETF Inflows Hit Record Levels
Inflows for U.S.-listed ETFs slowed last year. From 2017’s record $476.1 billion, inflows in 2018 dropped to $315.4 billion. But even with the smaller haul, 2018’s inflows were the second-largest ever.
A precipitous decline in the U.S. stock market and a roller-coaster ride in interest rates didn’t stop investors from plowing billions into ETFs. Even during December, a horrendous month for equities, investors added nearly $50 billion to ETFs.
If 2019 is a better year for markets, as I suspect it will be, investors will continue bolstering their ETF positions. It wouldn’t be surprising to see annual inflows for this year to come in close to or exceed the record from 2017. A monthly pace of $42 billion/month will put inflows at $500 billion by the end of the year.
Bitcoin Approaches $1,000
My prediction on bitcoin from last year was off the mark. The cryptocurrency bubble didn’t get bigger, as I speculated it would. Instead, it burst in spectacular fashion in 2018, much earlier and faster than I imagined it would.
That’s the story of bubbles. You never know how big they’ll get or when they’ll burst—only that one day the music will stop.
If 2018 was the year the bitcoin bubble burst, what does 2019 bring? I suspect prices will continue trending lower, all the way to $1,000. That’s complete and utter wild speculation on my part. No one knows where bitcoin prices will bottom out (or if they already have).
But down 95% from the high—similar to the decline in shares of Amazon during the bursting of the dot-com bubble—sounds right. Perhaps from there bitcoin can begin a bottoming process, and speculative traders can begin wading in.
Unfortunately, there’s still no U.S.-listed bitcoin ETF available for purchase, but there are ETNs available in Europe.
New King Of The ETF Hill: IVV
I’m going way out on a limb with this one, and I have a strong feeling that this prediction is a few years too early. Still, based on the trends we’ve seen in recent years, it seems inevitable that the iShares Core S&P 500 ETF (IVV) will eventually surpass the SPDR S&P 500 ETF Trust (SPY) as the world’s largest ETF.
In 2018, SPY had outflows of $16.5 billion, compared with inflows of $18.5 billion for IVV. In the year before that, SPY had inflows of $10.6 billion, compared with inflows of $30.2 billion for IVV.
The gap in assets under management between the two has been closing fast, as long-term investors gravitate toward the cheaper IVV. Today it stands at $91 billion—SPY with $242 billion in AUM and IVV with $151 billion.
Don’t get me wrong; $91 billion is still a huge chasm. It’d take something like $45 billion of outflows for SPY, and $47 billion of inflows for IVV to close it this year. Unlikely? Sure. But definitely not impossible.