2018 was a year that characterized by general growth in the first few quarters followed by a period of steady economic decline beginning around the end of September. However, depending on your preferences and risk tolerance as an investor, volatility and decline are not always negative—if you can properly time your entries into and out of certain positions, you may be able to earn a significant return on your investment.
In this article, we will briefly review the current state of the economy (both in the United States and globally). We will also discuss some of the events that are likely to occur over the course of the next year and the impact that these events may have on your financial portfolio.
2018: a Disappointing Year for Most Major Indexes
Though there are many indicators that can be used to measure the general health of the economy, there is no doubt that the major indexes are among the most relevant. Despite promising performances towards the beginning of the year, both the S&P 500 and the Dow Jones Industrial Average (DJIA) ended the year with measurably negative growth.
With the Dow ending the year with a 5.6% loss and the S&P 500 ending the year with a 6% loss, 2018 was the first year since 2008 where both these indexes ended the year in a position worse than they started. The possible explanations for these disappointing closing quarters are wide-ranging and include complications due to tariffs, the end of the stock market “sugar rush”, the Federal Reserve’s increasing interest rates, and various others.
The performance of these indexes is crucial due to the fact that they are major components of many American’s (and non-Americans) retirement funds and—because they are composites of some of the largest companies in the world—they are often indicators of the health of the economy as a whole. Though a negative year for the major indexes does not necessarily indicate the beginning of a recession, it is certainly a red flag signaling possible problems for 2019.
Possible Signs of a Pending Recession
It is important to note that while the term “recession” is often used to describe a time when the economy is ambiguously doing poorly, there is a formal definition for the term as well. A recession “officially” occurs when there have been two consecutive quarters of negative growth (as measured by GDP) which, according to even the most pessimistic forecast, has not yet occurred in the United States.
The Federal Reserve of Atlanta estimates that Q4 GDP growth will likely total to be anywhere between 2% and 3%, meaning that a formal recession is at least 6 months away. However, the current market conditions still bear a passing resemblance to those existing before the 2008 financial crisis, which has many investors and economists concerned for the future.
The first sign that a recession may be beginning to formulate is that the Federal Reserve has changed its long-term strategy. Usually, increasing interest rates coincide with strong economic performance, which is what was experienced for the first half of 2018. But—according to CME Group—between the beginning of November and the end of December, those who expected interest rates to either decrease or remain the same in 2019 shifted from less than 20% to more than 80%.
Other signs of a pending recession (beyond the dramatic losses of stock market momentum) include investor’s steadily decreasing levels of confidence and numerous companies adjusting their earnings forecast. In fact, only one day into the new year, Apple CEO Tim Cook adjusted quarterly earnings downward. According to the Wall Street Journal, this is the first time the company has done this in fifteen years and will likely issue an even further blow to the value of a company that has decreased by $300 billion since peaking in October.
Managing Risk and Preparing for the Future
JP Morgan has forecasted that the probability of a recession occurring in the next two years is currently over 60 percent. This will ultimately result in many investors shifting their wealth to safer assets with high liquidity and positive forecasts.
While these general economic woes may create issues for the average American family as a whole, they also create opportunities for those who are risk tolerant. High levels of volatility will create many opportunities for day traders and—assuming investors demonstrate the same survivalist instincts they did a decade ago—most major indexes will likely dip further than necessary, creating the possibility for even further productive positions.
For those who are unsure about risking their savings and gambling on highly volatile stocks, then diversification will likely be the best approach. Investing in multiple different industries, markets, and financial instruments will help reduce overall exposure to asset-specific risk.
When confronted with the overwhelming amount of data available, there is no surprise that many people are having an increasingly pessimistic view about the near economic future. There are still many things that can change between now and the end of 2019, but it certainly seems like that the next few quarters will remain bearish.
This article was originally posted on FX Empire
More From FXEMPIRE:
- Flash Crash on the JPY. Golden start of the 2019?
- EUR/USD Price Forecast – Euro bounces for Thursday session
- Gold Price Prediction – Gold Rallies as the Dollar Continues to Slide
- Trading plan for January 4
- What are the Next Trends in the Economy and Financial Markets?
- AUD/USD Price Forecast – Australian dollar bounces wildly