The Economy and Financial Markets: Forecasting What They ‘Might’ Do
It is possible, in my view, to forecast the economy's course only in the very near term.
In the title, I say might because it is difficult to forecast our massive, multi-faceted, economy, let alone the financial markets. To do this with great accuracy is probably a fool’s game. That said, it is possible, in my view, to forecast the very near term, which is what I will attempt to do in this writing. We will examine, in plain language, the remainder of 2018 and 2019.
2018
The U.S. economy is doing very well. The policies set forth by the current administration have stimulated the economy in ways we haven’t seen in over a decade. For those of you who do not like the current president, please understand, I am talking about policies, not people or political leanings. To be clear, I may not like many things he says, but I do believe in most of the economic policies…thus far. With this disclaimer, let’s look at the remainder of 2018.
The stock market has been overdue for a correction. I believe we have just seen it. With a strong economy, low unemployment, and relaxed regulations, I expect this holiday shopping season will be very strong, especially online. That should help propel stocks higher as we approach Christmas.
2019
2018 will be the first full-year under the new tax laws (i.e., tax cuts passed in late 2017). This should lead to greater tax refunds and more spending. More spending should foster strong corporate profits and I expect things will do fine through the first quarter, perhaps into the second quarter. That’s when it gets a bit murky.
As I have said several times, if we get to June 3, 2019, without a recession, this will be the longest period in the history of the U.S. without an economic downturn (recession). This growth cycle will end at some point. I think the economic stimulus from the current administration has served to extend this growth period, but it will end at some point.
Economy in 2019 and Beyond
I expect the probability of recession will increase substantially by mid-2019 into 2020. How do stocks perform during recessions? There have been 23 recessions in the U.S., including the one that started in 1899 and continued into 1900. I have studied each one. Let’s look at the following chart. The red, vertical-shaded areas indicate recessions. The blue line is the Dow Jones Industrial Average.
Notice how stocks declined at the beginning of every recession except 1919 and just after WWII.
Now we will look at how a stock investor would have fared if they had invested on the first day of each recession (please refer to the following chart). This chart shows the return of an investment from the beginning to end of each recession.
In most cases, the investor suffered a loss. In general, the worse the recession, the greater the loss. Where do we go from here?
For Clients
This section is for clients, based on three categories:
- Newer clients/accounts with a lot of cash
- Clients who are invested, but are not withdrawing money
- Clients who are invested and are withdrawing money
1) Newer clients or accounts with a lot of cash
- I put some cash to work in stocks near the most recent bottom. I will find a home for the rest. There are many places to invest, but I will not chase returns (buying at peaks). We need to be patient and prudent. Better buying opportunities will come.
2) Clients who are invested, but ARE NOT making withdrawals
- Be patient. You should be fine. I do not expect a major crisis, at least there is nothing on the immediate horizon (see general comments below).
3) Clients who are invested, but ARE making withdrawals
- If your annual withdrawals are less than 4-5% of your total financial assets, you are in a better place. If your withdrawals are greater than that, it could pose a problem, depending on the size of your nest egg.
General Comments
There are some risks as follows:
- The Fed has been tightening (raising interest rates and reducing the money supply).
- The Trump tariff talks
- The slowing global economy (outside the U.S.)
- The large amount of corporate debt. While interest rates were artificially low, corporations have used this “cheap” money. As rates rise, smaller companies may be hit worse as their debt is not fixed, but resets as rates go higher. Larger corporations have more fixed-rate debt.
As of this point, I expect to reduce stock exposure sometime next year. I will have to wait until we get closer to know when. As I have stated repeatedly, there are four possibilities with an investment.
- Large return
- Small return
- Small loss
- Large loss
My goals, has, and always will be, to avoid large losses. Remember, if we can avoid large losses, we won’t need super-high returns to come out on top.
If you have any questions, please let me know.