The U.S. economy continues to be strong, while moderating a bit at the edges. We expect GDP growth of about 2.9% for the fourth quarter of 2018, which will create a 3%-plus year -- but next year’s growth is the question, writes Monty Guild Friday.
Many are saying that GDP growth will fall to a rate below 2% by the end of next year. We don’t see that currently in the picture.
Taken alone, U.S. GDP growth should be over 2.5% next year. However, this is a deceleration from GDP growth of well over 3% in 2018, and so is viewed by some as a negative. If GDP can maintain a sustainable rate in excess of 2%, this will be good for the economy, the stock market, and the wealth of the American public.
Of course, the U.S. economy operates as part of the world economy, and thus is affected by problems that have appeared in Europe around Brexit and the Italian budget. A negative outcome for these could cause a further decline in U.S. economy, and positive news on these could improve the outlook for the U.S. economy.
U.S. Stocks
The U.S. stock market has had a well-documented decline of about 10-11%, while some faster growing sectors have had a much bigger correction -- such big tech leaders, the so called FAANG stocks (FNGU), and high-earnings-multiple growth stocks in the cloud and biotech sectors. Under the surface the market has declined substantially, with 40% of S&P (SPX) stocks correcting by 20% or more.
This has frightened many observers into saying that the market is discounting a U.S. recession coming in 2019.
We are hard-pressed to see economic evidence of a U.S. recession in 2019. Neither do we see a global recession bleeding into the U.S. in 2019 which could cause a U.S. recession by damaging our trading partners or the world banking system. Thus, we believe that the current reaction in the market is due to:
- Fears that too many interest rates increases, by the Federal Reserve in 2019 could cause a U.S. recession soon beyond 2020. We realize that this fear is rampant, but it is not supported by economic facts.
- Fears that the current economic slowdown in China will spread to the rest of the world due to the trade conflict with the US and other nations.
On the first point, we believe that these interest rate fears will be quelled as a result of comments by several members of the Federal Reserve in the last two days. Several of them have said that the Fed would be data dependent, and not continue to raise rates without closely monitoring if the economy was weakening.
These comments should reduce fears that the Fed is not data dependent. These fears of irrational interest rate increases without economic justification have been widely circulated in the media. Clearly, these recent statements by Federal Reserve members do re-establish the fact that the Fed will be data dependent and thus is much less likely to create a recession by raising interest rates excessively.
On the second point, China has announced several measures, both monetary and fiscal, to boost credit and pump up housing prices. China’s main action to expand economic activity is to increase the availability of credit to stimulate housing prices. They took their first major steps in this regard about a month ago.
Historically, when actions like these are taken in China, they are reflected in the economy about nine months later. We expect Chinese GDP growth to rebound in mid-2019 as a result of these policy changes.
Regarding 2019 recession fears, we do not see a U.S. or world recession in 2019, and we believe predictions of a recession in 2019 are incorrect.
However, as we have said for many months, the world will go into a recession sometime in the next few years after 2019. The recession will probably be centered outside the U.S.
Two possible sources of eventual problems are China’s over-levered financial system and Europe’s weak southern periphery as centers of banking weakness that could lead to the next recession.
In summary, during the period of stock market correction, we have moved out of over-priced sectors and increased cash holdings. We are always looking for new areas of opportunity, and holding cash will allow us to easily take advantage of them as they arise.
Europe
Europe’s weak banking system, which was not restructured after the crisis of 2007 and later, remains a big concern of ours. We are not optimistic about the prospects of Europe as an investment destination. The fight over Brexit and the looming immigration problem also diminish Europe’s attractiveness in our view -- even after Europe’s poor performance in 2018, which, as measured by the Vanguard FTSE Europe ETF (VOK), is down 14% thus far in U.S. dollar terms in 2018.
Emerging Markets and China
China is a developed market that sets the tune for many South East Asian emerging markets to whom they outsource work. China is down 21% year to date, and although they have started to loosen their lending regime it will take a few months to reflect in the Chinese economy and stock market. China may become an attractive investment destination in coming months.
EM has also had a rough year, down 14.5% for the main emerging-markets ETF in 2018. Eastern European emerging markets have performed better. Latin American markets have been erratic, with Brazil rallying since their political environment has changed, but much of the rest of the continent doing poorly.
Gold
Gold is down about 8% this year. The two major drivers of gold -- which are inflation in developed countries, and instability in the world banking system -- have not been present, nor has the possibility of a major war.
Although moderate inflation has been a problem in some gold-importing countries such as India, governments have been instituting rules to make gold importation expensive. A strong dollar (USD) has also weighed on the price of gold and other materials.
Cryptos
The crypto bear market continues. Bitcoin (BTC-USD) sank below $4000. Besides the chilling effect we noted last week of an IMF endorsement of government-sponsored digital currencies, even many convinced crypto advocates are becoming convinced that price discovery in crypto markets has been significantly impeded by fraud and ill-dealing on the part of some exchanges. If the past is a guide, the current bear could last for months.
Guild recently taught a Master Class on cryptos and digital assets at the Dallas MoneyShow; if you are interested in seeing the slide deck from this class, please send us an email.
View Monty Guild’s presentation, Global Stock Market Outlook 2018-2019 here.
Recorded: MoneyShow Dallas, Oct. 5, 2018.
Duration: 10:17.
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