It’s that time of year when our thoughts turn to resolutions, goals, refreshing of bucket list ideas and even a bit of rumination regarding our course of life. Consistent with the traditions associated with the beginning of the year, we get to look back on our 2018 forecasts and offer our forecast for the next year.
Let’s start with interest rates – specifically the U.S. 10 Year Treasury Note. The 2018 year began with the yield on the U.S. 10 Year at 2.41%. Our forecast was for the yield to reach the proximity of 3 -3.2%. In late August into early September, the yield reached upwards of 3.40% only to careen down to finish the year at a 2.69% yield. Interest rates were like a kite with no one holding the string; dancing and gyrating to the ever-changing tunes played by political leaders and financial markets. In the end, interest rates moved in the direction we anticipated; they just didn’t hold at the level we had forecast.
Economic growth-encapsulated by U.S. Gross Domestic Product (GDP) – moved in synchrony with our forecast. We anticipated seeing year over year growth at 3.2%. While we do not yet have the fourth quarter numbers, we anticipate we will see 2018 GDP come in very close to our 3.2% forecast. This should be the first time since 2005, GDP in the U.S. has registered a growth rate higher than 3.0%. At the time of our forecast last year, we were on the high end of GDP growth estimates – it was nice to see the economy gather steam throughout the course of the year.
The Stock Market
It just didn’t happen the way we anticipated. Through the first three fourths of the year we were right on target for our 10% positive move. Then, the fourth quarter happened. The stock market as measured by the S&P 500 had a total rate of return for the year of -4.38%. In general, assets outside of large U.S. based companies took an even bigger punch to the chin making global diversification a bitter pill to swallow in 2018.
Since driving forward by looking solely in the rear-view mirror is a recipe for disaster, let’s refocus our eyes on “what’s next” and take a stance on the year ahead.
We are going to start with economic growth – specifically looking at the growth we anticipate occurring in the U.S. We believe GDP will be positive; though at a lessor pace than what we experienced in 2018. Using a single point for our forecast – we think we will see GDP grow at a 2.8% increase in 2019. The first and second quarters of the year should show the slowest growth of the four quarters. Third quarter showing a resurgence and the fourth quarter, we believe, will be quite strong. Uncertainty over trade tariffs along with an adjustment to a new political environment will put a check on growth; but we don’t believe it will extinguish the growth fire.
Interest Rate Forecast
The training wheels are off interest rates. The Federal Reserve is intent on its mission to return interest rates to a place where they reflect “normalcy” – a term often used; but find difficult to define as it is a nebulous and moving target. Still, the image of riding a bike without training wheels conjures up the appropriate analogy for interest rates and their attendant effect on the economic growth and the financial markets. Interest rate moves will be more volatile and pronounced as we navigate through this coming year. We expect the U.S. 10-year interest rate to again climb higher by the end of the year, approaching a 3.35% yield. We see the bulk of this move coming at year end and we anticipate the Federal Reserve waiting on its next rate hike until then as well.
We will continue to use a short-term U.S. treasury laddered structure for assets designated to be invested in the fixed income area. This laddered strategy provides strong credit quality, competitive interest, liquidity and flexibility to adapt to economic changes.
Stock Market Forecast
This past year, more specifically, the last quarter of the 2018 year, created an attractive opportunity for stocks. We like the valuations for stocks and we think this is a good time to be invested in stocks. The recent pullback in prices has given us an opportunity to make some changes that we believe will enhance the return from our current investment allocation and we are taking advantage of the opportunity.
Just as we discussed in our outlook for interest rates, we believe the increased volatility in the stock market is here to stay. This means we will see quicker moves, both up and down in the stock market. Remember, no training wheels to help keep us steady; but, at the same time, it gives us an opportunity to move faster and further. We expect to see returns from the stock market in the plus 15% area for the year.
Things to wonder about….
We have concern about world political stability – particularly in the Middle East. We hope our concern will be overblown, much like the domino theory associated with our withdrawal from Vietnam several decades ago. Yet, there is a feeling of change blowing in that part of the world and it could have some significant impact on the rest of the world.
Inflation – We think it is too early to claim that inflation has been tamed or that it simply won’t be a factor in our economic conversations. By the end of the year, we suspect inflation will be a word we use more often and a factor affecting our purchasing power.
Trump Presidency – The old saying, “May you live in interesting times,” will undoubtedly apply to President Trump this coming year. While it may make for good theater, we hope the antagonistic relation between our elected representatives does not get so messy and ugly that they forget to govern the country.
We wish you a happy and healthy new year. May you be blessed with good fortune, happiness, health and peace in your life and in the lives of your loved ones.