After a mixed first half of the year and a solid third quarter, stock markets weakened considerably in the closing weeks of 2018. Turmoil in the financial markets is never a pleasant experience for investors, and that’s why we rely on helpful guidance, context, and insight to help us weather these times and prepare for what may lie ahead. Indeed, LPL Research’s recently released Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets provides investors with a guidebook for navigating a maturing economic and market cycle.
Several factors are weighing on investor sentiment right now, including policy uncertainty regarding trade, weaker oil prices, the path of interest rates, and the geopolitical environment. Despite these pressures, the fundamental backdrop supporting growth in the economy and corporate profits appears to remain sound, suggesting that this market weakness may not lead to a recession in 2019. The U.S. economy remains solid and continued growth is expected to support solid potential stock gains in 2019.
Policy has been a prominent factor this past year, as the contribution from fiscal incentives including tax cuts, reduced regulation, and increased government spending helped boost growth. The combination of these trends propelled U.S. growth toward annual gains of approximately 3% (as measured by gross domestic product), and the stock market managed to achieve all-time highs during the third quarter. Policy uncertainty has increasingly weighed on investor sentiment, however, particularly surrounding the midterm elections and as trade tensions have continued to make headlines.
Anticipation was high for a tariff agreement between the U.S. and China at the G20 summit meeting. Although it concluded with a lengthier path toward progress than most had hoped for, continued progress is still expected in 2019. Oil prices remained weak after the announced OPEC production cut, as investors debated whether weakness was due to slowing global growth. Rather than a demand problem, oil appears to be a supply issue and thus not indicative of a recession, particularly now that the U.S. is the world’s leading producer.
Perhaps the biggest policy uncertainty weighing on the markets has been the Federal Reserve (Fed) and the future path for interest rates. The Fed’s recent rate hike, coupled with reduced growth forecasts, added to investor concerns and further pressured stock prices. Considering LPL Research’s forecast of steady economic growth and lower than average inflation, the Fed may keep interest rates lower in 2019 than the markets currently fear.
Although market weakness can be alarming and cause investors to question their strategy, this is when we must focus on what matters in the markets and try to remain calm. The combination of high employment, solid consumer spending, improved trends for business investment, and mild inflation should result in a firm, fundamental foundation supporting growth in the economy and corporate profits in the year ahead.
For additional description and disclosures, please see the full Outlook 2019 publication.
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