Highlights
• Economic growth is likely to slow in 2019, but we don’t expect a recession.
• Likewise, corporate earnings growth may trail off from the 2018 pace, but should remain positive.
• Investors probably need to see more clarity around trade and other issues, but the positive long-term outlook for stocks persists.
Investors enter 2019 facing a critical question: Does the sharp selloff in stocks that ended 2018 presage a pending economic recession, or does it represent merely a painful correction on the way to another uptrend? If pressed, we could make a case for either outcome, but we come down more on the optimistic view. We think volatility will remain relatively elevated, especially in the short-term, until we see more clarity around trade policy and other issues. But at the end of the day, we do not think conditions are in place to produce a recession and expect economic and corporate earnings growth should remain good enough to push stock prices moderately higher by the end of the year.
A Mix Of Positive And Negative Signs
The steep decline in stock prices since early October implies a dire economic outlook. Our view is more upbeat. We think economic growth will moderate in 2019, but risks of a recession appear quite low given healthy consumption levels, a strong labor market and still-relatively-easy monetary policy.
Last week’s economic data may serve as a good microcosm for the rest of the year. On Thursday, the ISM Manufacturing Index for December fell sharply from 57.9 to 54.1.1 This was the steepest one-month drop since 2008.1 The decline certainly contributed to a sense of woe, but the index remains in expansion territory.1 That data was followed on Friday by a very strong labor market report showing a higher number of new jobs and a notable rise in wages.2 All told, last week’s economic data point to an economy in the latter stages of an expansion, but one that remains in an upward trajectory.
Federal Reserve policy has also been a source of concern, with some concerned that the Fed may have already gone too far in its rate-hiking campaign. Fed Chair Jerome Powell sounded a relatively dovish tone last week when he reinforced the notion that the Fed would remain data-dependent as it approaches any future rate hikes. More to the point, we think policy remains easy and believe the economy could withstand some additional tightening in 2019.
The equity outlook for 2019 is likely to hinge on corporate earnings results. As recently as September, the consensus expectation for 2019 S&P 500 earnings per share growth was around 13 percent.3 That has since fallen to 8 percent.3 We think that number may still be too high, and expect to see a growth level of closer to 5 percent or 6 percent by the end of the year. That would represent a significant reduction from last year’s stellar number, but should still be good enough to help equity prices make gains this year.