What’s happening now:
Interest rates – Not much has changed surrounding interest rates since last month. Although most Fed committee members believe two hikes are warranted in 2019, Chairman Powell’s comments in December did not give a strong indication that rates are near neutral. Rates along the yield curve, such as mortgages, have softened and helped home builders start to recover from a poor 2018. We expect the strength of the economy will outweigh the periodic stress of rising rates throughout 2019.
Trade War – President Trump has stepped up the pressure on China in the face of a looming trade deal deadline. With China’s economy slowing, no doubt in part to pressure from the United States tariffs, the administration is seeking a “real deal” now. There are many key issues to be addressed, including intellectual property rights and the trade deficit. We expect these negotiations to last until late February as we approach the March 1 deadline. As those negotiations evolve, we expect a few volatile days in the markets as both sides use the media for leverage.
Government Shutdown – The current shutdown is the longest in United States history, with no signs of a deal as of this writing. The centerpiece of the debate is the roughly $5 billion border wall funding. President Trump sees the wall as a key campaign promise that must be fulfilled. Democrats see the wall as an antiquated approach and feel better solutions are available. Although markets have rallied for most of the shutdown, we do not have a full understanding of the national economic impact yet. As the shutdown ages, we believe uncertainty will begin to materialize bringing equity market volatility along with it.
Market Recovery – After the equity losses in December, the S&P 500 Index has rebounded out of correction territory. We feel the panic in December was overblown, fueled by seasonal tax loss harvesting in conjunction with fears on rates, the government and trade. However, we do not see the equity markets reaching all-time highs in the short term unless the key issues mentioned above are resolved. Thus, be prepared for volatile periods throughout the first quarter of 2019.
The month ahead:
Markets will continue to focus on the border wall showdown and trade conflicts. The recovery in the stock market over the past weeks has been welcomed, but we are still concerned that the key issues contributing to December’s dramatic downturn have not been overcome. We expect the government shutdown to end in the coming weeks with some form of a negotiation that allows both sides to claim a small victory, but we do not expect US-China trade resolution until late February. Be prepared for some anxious days and weeks.
The bottom line:
We continue to see stable and healthy economic data. Currently, we have no economic data that supports a recession in the next 6 to 12 months.
Financial Advice is offered through Mid Atlantic Financial Management, Inc. (MAFM) a Registered Investment Advisor. Tempus Advisory Group is not a registered entity or a subsidiary or control affiliate of MAFM. This information should not be duplicated or distributed unless an express written consent is obtained from Tempus Advisory Group in advance. The views expressed here reflect the views of the Tempus Advisory Group Investment Committee as of 1-22-2019. These views may change as market or other conditions change. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Past performance does not guarantee future results and no forecast should be considered a guarantee either.
