On 12/25/2018, the Kansas City Star posted a story titled, “Economy is Strong. Leadership is Shaky”. As most of you are aware, 2018 was a year that gave us a very volatile stock market, especially in the 2nd half of the year. The S&P and the Dow were both up approximately 6% by mid-year. By 12/31/2018, the S&P was down -5.6% and the Dow was down -6.2%. International stocks ended the year down -16.8%. This leads us to the question: Is the recent market volatility being caused by a bad economy or fear based on non-economic factors?
Most of the non-economic talk is in regard to political things that might happen or haven’t happened yet. The most important thing that actually has occurred is that the President has refused to sign a spending bill that does not contain funding for a border wall. This has resulted in a shutdown of the non-essential areas of U.S. Government. No-one likes a government shutdown. However, the key word here is “non-essential”. The government hasn’t been completely shut down. Everyone should still be able to get their Social Security checks, Medicare Insurance, etc. Another government activity that is happening as this commentary is being published is that the U.S. has a team meeting with China attempting to negotiate a new trade deal. Not having a U.S./China trade agreement has effected both countries, but many economists feel it is having a greater negative effect on China.
On the economic side we still have very low unemployment numbers, the S&P 500 companies are projecting a 7.9% increase in earnings in 2019, and the Federal Reserve is still talking about raising interest rates. We don’t think we should be concerned about the interest rates until the Federal Funds rate reaches the historical norm in the 4.5% – 5% range. The last interest rate hike was from 2.5% to 2.75%. The Federal Reserve is simply trying to get interest rates back to normal. The simple fact that the Fed wants to raise interest rates is another indication the economy is strong. The Fed has been waiting for years for the economy to get strong enough to absorb the necessary interest rate hikes to get us back to normal.
There are many reasons to be optimistic as we turn the page to 2019. Most of the economic indicators look positive and we have reason to believe we could have a trade agreement with China that may help the swooning international markets.
We hope you have a very Happy New Year!
Sources: WSJ, Kansas City Star, Yahoo Finance