Swedroe: 8 'Sure Things' For 2019

Every January, I start keeping track of what I hear in the financial media and from investors in terms of predictions for the upcoming year. Today we’ll look at a list of some common “sure things” I’ve been hearing for 2019.

Economic & Market Expectations
The first sure thing is that U.S. economic growth will continue strong but will slow slightly from about 3% to 2.7%.

The second sure thing follows from the first—corporate profit growth will continue to be strong, with Morgan Stanley predicting S&P 500 companies’ earnings will reach a cumulative $178 a share, an increase of about 8%.

The third sure thing follows from the first two. The U.S. stock market will have a strong year. Bloomberg gathered 14 forecasts for 2019 from the firms it tracks, and the average prediction was for the S&P 500 to rise to 3,056 by year-end. Fueling the strong forecast was that, based on forecasted earnings, valuations had fallen to the cheapest levels since 2006—the forward-looking P/E is only about 15. Mike Wilson at Morgan Stanley was the least bullish, with a target at 2,750. Stocks will also be supported by continued strong buyback programs.

The fourth sure thing is that, with economic growth moderating, inflation will remain tame. The consensus forecast of professional economists is for the CPI to increase at just 2.3%. The market certainly agrees, as the spread between 10-year TIPS and 10-year nominal Treasury bonds is only about 1.8%.

Fixed Income & Interest Rates

The fifth sure thing is that, with slowing economic growth and tame inflation, it’s now safe to extend maturities. Futures markets show a 91% probability of no rate increases in 2019 by the Federal Reserve. Thus, longer-term bonds will outperform.

The sixth sure thing is that, with the Federal Reserve lowering expectations for further rate increases (the market now expects only one rate increase in 2019), and the European Central Bank beginning to unwind its easy monetary policy (having ended its bond-buying program and expected to begin to raise interest rates in the second half of 2019), the dollar will weaken versus the euro.

The seventh sure thing follows from the sixth. The concerns over continued massive budget deficits combined with the weaker outlook for the dollar will lead to gold putting in a strong performance.

The eighth sure thing is that, with continued uncertainty over the risk of trade war, the problem of Brexit, and the standoff between the European Central Bank and the Italian government over the Italian budget deficit (among other geopolitical problems), volatility will remain high. The VIX ended 2018 at 25.42.

That’s my list. I’ll report back at the end of each quarter.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.