We begin by wishing everyone a happy, healthy, and prosperous 2019.
The U.S. stock market just concluded the worst week near the Christmas holidays in many years, and some stock market participants have been panicking.
Then the economic news arrived yesterday morning. Mastercard [NYSE: MA] announced that holiday sales for the period from November 1 to December 25 were the strongest in six years, and up 5.1% from last year — with online sales up 19.1%.
To keep inflation under control, citing strong economic growth, the Federal Reserve recently raised rates for the ninth time, and reiterated its intention to continue reducing the size of its balance sheet (which had swollen during three rounds of quantitative easing, or QE, in 2008–09, 2010–11, and 2012–14).
The U.S. is closing a year of exceptionally strong economic data. Profits for the S&P 500 are going to be very strong, up around 24%.
Outlook for the U.S. and World Economy in 2019
We anticipate another good year of U.S. economic growth in 2019. Of course, it will be growth at a much lower rate than we experienced in 2018 when the U.S. had a big tax cut, and the impetus of that cut caused a strong increase in corporate hiring and spending.
2019 should see profit growth closer to the historical trend growth of 7% for the S&P 500. The big question as we move toward 2020 will be: Will we have a recession in that year? In our view, any recession in the next two years will not start in the U.S. In this country, economic growth is currently strong and durable. There are major economies in the rest of the world where an economic slowdown could originate, and because the world economy is greatly interconnected, we are watching them carefully.
Both Europe and China are potential trouble spots, and either one could weaken sufficiently to impact the world economy. Such weakening is not currently visible, but Europe appears very likely to have slower economic growth in 2019 (at a rate of about 1%), while China will claim 6% growth (it will really be about 4%), and the U.S. will have economic growth in the 2.5% range. The U.S. is a huge economy, and based on the history of the last 10 or 15 years, 2.5% growth will be above historical trends, and well above the 1.5–2% rate at which pessimists claim the U.S. can grow.
In summary, we expect moderate global economic growth and modest global inflation in 2019.
Inflation
Inflation in the world’s developed economies should be moderate in 2019. Japan will have trouble getting inflation above the 1% line and keeping it there.
However, inflation may turn out to be a problem in some emerging markets. The key to inflation in many emerging markets is the value of their currency against the U.S. dollar. It is no secret that many nations lower their currency value in order to export more goods. Those countries which depreciate their currency too much will be suffer some inflation — perhaps in the 3 or 4% range. This will create demand for gold and other precious metals in those countries.
U.S. Stocks
We anticipate a continuation of volatility in U.S. and other developed-country stock markets in 2019. We don’t see markets collapsing, but rather moving volatilely up and down, with a downward bias for the first part of 2019. After a few months, we will see if global economic growth is indicating that a recession could occur in early 2020. If that looks like the case, we will need to go through a longer base-building period before moving ahead.
If growth remains strong and visible, we anticipate a rally in stocks in 2019 that takes the market up by about 5–10% by the end of next year.
We do not have any favorite groups at this stage, but believe that long-term investors should be watching cybersecurity, software, video games, biotechnology, consumer and financial services, entertainment, and travel. In our view, all of these sectors have excellent long-term prospects.
Currencies
We believe the U.S. dollar will depreciate modestly, with the Brazilian real and Japanese yen rising. We expect the yen and the real to provide good opportunities for investment in 2019.
Gold and Precious Metals
After many years in the doldrums, the demand for gold has recently been stimulated by a confluence of events, including more inflation in the emerging world; instability in world governments; annoyance with monetary and fiscal authorities in many countries; and the advent and rise to power of autocrats who are organizing in many countries to employ blockchain technologies to monitor and record the financial dealings of all their citizens.
We have seen how autocrats in Venezuela and Zimbabwe have literally destroyed the economy in those countries. We have also seen how corrupt government officials in Brazil, Argentina, India, China, and a hundred other countries have used the power that they hold as elected officials to siphon off public funds for their own enrichment.
This corruption is endemic worldwide. After 50 years of global investing, our opinion is that serious corruption — which acts as a tax to slow economic growth — is prevalent in all but about two or three dozen countries worldwide out of over 200 countries. If the regimes governing these countries have data on the assets of citizens they may use those data to confiscate, tax away, or otherwise take these assets. Hence the appeal of gold coins and bullion.
This tightened data gathering by governmental authorities all over the world will increase demand for gold coins and bullion, as savers in these autocracies try to keep a nest egg which is not going to be confiscated. In the U.S., this is a very unlikely possibility, but in many parts of the world, if the government knows that you own assets, those assets are at risk of confiscation.
The trend in the gold price shifted in late 2018, and we believe that 2019 will be a good year for gold. We are holding more gold for clients than we have in many years. We believe that inflation’s rise, combined with economic disruption, will cause demand for gold to rise, and we anticipate that it will be among the better investment areas in 2019. We favor gold coins for readers’ personal holdings, and believe that investors who own gold mining stocks should stick to those where management is deeply involved as stockholders of their own company.
Thanks for listening; we welcome your calls and questions.
Wealth Builder Dividend Portfolio Management
In January 2016, some of our clients who are retirees asked us if Guild could offer accounts that would hold income-producing securities, and yet would not suffer like bonds as interest rates rose in 2016 and beyond. (Guild had recently notified clients to expect several years of interest-rate increases and bond-price depreciation.)
Guild selected 15 to 20 dividend-paying common and preferred stocks that we believed could be used to create income for clients during a period of rising interest rates. We picked stocks which paid dividends well in excess of the return on 10- and 20-year U.S. Treasury bonds, and which we believed would increase their dividends in a rising interest-rate environment. Except in the case of a major global calamity, we anticipated very low portfolio turnover, thus minimizing taxation risk.
The results have been good and while losses with stocks are always possible, we anticipate that results will continue to be good in the rising interest rate environment that we see ahead. For further information, please contact Aubrey Ford (aford@guildinvestment.com) at Guild Investment Management.
