2019 Economic & Market Outlook Fisette Financial Services, LLC 963 NE Discovery Drive, Issaquah, W A 98029 (425) 507-9004 January 18, 2019
Gross Domestic Product Consumption (68%) + Investment + Govt + Net Exports 1947-2018 Average 3.2% Q1 2018: + 2.2% Q2 2018: + 4.2% Q3 2018: + 3.5% Q4 2018(e): + 2.8% Source: Federal Reserve Bank of St. Louis
Truck Tonnage Topped out well in advance of last 2 recessions (shaded areas) Source: Federal Reserve Bank of St. Louis
Institute for Supply Management Manufacturing Business Activity Index Usually peaks 35 months prior to Dec 2018: recession 54.1 (59.8 Sep 2018) Good, but 5 Could it be to “beat the tariffs?” point drop in December Above 50 indicates expansion Source: Tradingeconomics.com
Institute for Supply Management Service Sector Business Activity Index Dec 2018: 57.6 Strong, but off the high Above 50 indicates expansion Source: TradingEconomics.com
Low Unemployment Rate: 50-year Low in Nov 2018! 5.8% 37-year average 3.9% Dec 2018 Source: U.S. Bureau of Labor Statistics
Initial Claims for Unemployment 17-Year Low 659,250 March 2009 Dec 2018 218,750 Source: U.S. Emloyment and Training Administration
Labor Force Participation Rate 63.1% Dec 2018 5-year high % of civilian 62.4% population 16 Sep 2015 and older in the 41-year low civilian labor force. People are finally starting to reenter the work force Source: Bureau of Labor Statistics
Job Openings (JOLTS) There are approximately 1,000,000 more job openings than there are people in the labor force to fill them. Source: U.S. Bureau of Labor Statistics
Factory Unemployment Rate: Did you Believe the Robots Were Taking All the Jobs? Mean 5.9% 2.8% Dec 2018 Source: U.S. Bureau of Labor Statistics
LEADING ECONOMIC INDICATORS 1.41 Oct 2018 37-yr Avg 1.29 Source: Federal Reserve Bank of St. Louis
Univ. Of Michigan Consumer Sentiment: Very Healthy… Very Important! 90.7 Dec 2018 Mean 86.1% Source: University of Michigan / Federal Reserve Bank of St. Louis
Small Business Optimism Index 104.8 Jan 2019 2016 Election Source: National Federation of Independent Business (NFIB)
Federal Debt – But Sadly, Nobody Cares $21.5T July 1981: $1T Source: Federal Reserve Bank of St. Louis
Federal Debt as a Percent of GDP 104% Source: Federal Reserve Bank of St. Louis
Federal Deficit as a Percent of GDP 3.4% 9.8% 2009 It’s going to get worse as population ages and interest rates rise. Source: Federal Reserve Bank of St. Louis
Corporate Debt as % of Market Value 51% 1994 38% Q3-2018 Source: Federal Reserve Bank of St. Louis
Federal Funds Rate Controlled by Federal Reserve Overnight Lending Rate (Bank-to-Bank) Mean: 4.82% 2.40% Dec 2018 Source: MacroTrends
10-yr Treasury Rate in 2018 Start: 2.58% Low: 2.40% High: 3.24% End: 2.69% NOT controlled by Federal Reserve 30-yr fixed rate mortgages are based on 10-yr Treasury rate Mean: 4.59% Source: www.multpl.com
10-Year vs. 3-Month Treasury Yield We want this to be a positive number; else, “inverted yield curve.” 0.31% Source: Federal Reserve Bank of St. Louis
Inflation? Not a Problem. Source: BLS, Factset, JP Morgan Asset Management
Tightening Labor Market … But Where’s the Inflation? 3.3% Mean Since 1960 2.0% Q3-2018 Source: Federal Reserve Bank of St. Louis, BLS
U.S. Dollar Strengthens 5% in 2018 Bad for Multinational Companies & International Stocks and Bonds We Own Wild swings, but trendless over 43 years Source: Tradingview
Earnings Drive the Stock Market S&P 500 Operating Earnings • 2014: $113 (+ 5%) • 2015: $100 (- 12%) • 2016: $106 (+ 6%) • 2017: $125 (+19%) • 2018(e): $162 (+29%) [but stocks fell!] • 2019(e): $170 (+5.2%) Source: S&P Dow Jones Indices; Federated Investments, Raymond James
Volatility Index (VIX) - A Measure of Fear “When VIX is high, it’s time to buy. When VIX is low, it’s time to go.” Dec 24, 2018 Feb 5, 2018 Dec 21 rebalance Source: Marketwatch.com
Secular Bear Markets Secular Bull Markets (16 – 18 Years) (10-12 years) Second Machine Age 2011 secular bull market began Source: JP Morgan Asset Management
2019 – Rough Year, but… We’re Still in a Secular Bull Market Source: JP Morgan Asset Management
Annual Returns & Intra-Year Declines -20% = Bear Market Source: JP Morgan Asset Management
International Stocks Have Lagged Since 2009 U n d e r p e r f o r m a n c e But Valuations are More Attractive Source: JP Morgan Asset Management
Industrial Revolution 3.0 / Second Machine Age • Companies are structurally more efficient, substituting technology for labor and capital. • Result: Double-digit profit growth from low single-digit revenue growth. • Technology companies require very little plant, property & equipment. • Artificial intelligence • Robotics • 3D printing Source: Federated Investors
Industrial Revolution 3.0 (Cont’d) • Implications: • Labor market requires higher skills • Disinflationary; e.g., Amazon.com • Less pressure on interest rates, as there is a lesser need for capital • Increased productivity • Critical if we are to grow with an aging population and reduced immigration. • McKinsey & Co. predicts productivity from automation over the next 50 years will be 4 – 5 times the steam engine 100 years ago. Source: Federated Investors
Labor Productivity Source: U.S. Bureau of Labor Statistics / Federal Reserve Bank of St. Louis
Raymond James’ 2019 Outlook GDP Growth: 2.6% Earnings Growth: 5.2% ( consensus expectation is 8.3%) Inflation: 2.3% Source: RJ Portfolio & Technical Strategy
What We Expect in 2019 • Continued global expansion, albeit slower than 2018 • Growth slows, but no recession • 0 – 1 Federal Reserve interest rate hikes – The Federal Reserve continues to sell mortgage securities it bought in 2008/2009, which in effect is the same as raising interest rates, albeit at a slower rate. • Declining inflation • Little change in interest rates • A significant increase in stock prices • Stocks are less risky AFTER the 20% decline.
Raymond James Chief Equity Strategist Jeff Saut Jan 4, 2019 “Morning Tack” Closing Sentence –“If you want to catch a wave, you have to grab a surfboard and get into the water.” Ladies and gentlemen, we are at the point where you need to “grab a board” and get into the water!”
Marty Zweig (1942-2013) Famous Contrarian and Wall Street Guru “Don’t fight the Fed!” Fed Chairman Powell Jan 4, 2019 "Particularly with the muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves." Source: American Economic Association in Atlanta
Our 2019 Concerns • The Federal Reserve overdoes interest rate hikes, and hurts the economy. • Consumer confidence fades because of the stock market selloff Oct – Dec 2018. • China trade war escalates. • Mueller has the goods on President Trump, but: – Very unlikely Senate would indict (needs 60 votes) – Even if Senate indicted, Pence would continue policies in a calmer manner.
Save the Date July 13, 2019 Client BBQ in Carnation
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