The U.S. economy continues to grow, but at a slower rate than in earlier 2018. According the Atlanta Federal Reserve, real GDP after inflation will be growing at about 2.4%. This is respectable, and will create GDP growth of over 3% in 2018.
The U.S. stock market has had a very volatile last two months, falling by 10% plus on two occasions. Currently, the market remains volatile and moving up and down with what participants view as positive and negative news about trade disputes with China.
Here’s our outlook for U.S. stocks in 2019. Next year, corporate profits will probably grow at about 7% after having grown by about 24% in 2018. Part of the growth in 2018 was due to the Federal tax cut. After adjusting for the tax benefit, growth in 2019 will be about half of the rate that it was in 2018. However, it is still growth, not decline. Next year we will still be in an economic expansion, not an economic contraction. One concern is trade friction which may take some time to resolve.
Why does this matter? Because in 2018, almost all world stock markets are down substantially. U.S. stocks so far are flat to down slightly. Stocks in some major industries like banking and industrial areas are down substantially. Commodities, foreign currencies, and bonds generally down. Real estate is down in some major US cities — NY, Miami, and parts of Los Angeles — with more and more major cities seeing their real estate prices top out.
After years where almost nothing has worked out for global investors, we often see a stock market renaissance if we are not on the edge of a major economic decline. We do not believe that we are at the edge of a major economic decline. We anticipate moderate U.S. stock market appreciation in 2019.
We anticipate that growth stocks at a reasonable price can appreciate next year. We are carefully monitoring companies that can grow at a steady pace and that are attractively valued. We are finding them in technology hardware and software, consumer, and financial services. We are waiting for the market to stabilize and provide entry points.
In Europe, the economy is slow-growing and only special situations look attractive to us. That said, some foreign currencies will do well next year. The British pound has been battered over the last few years since the Brexit vote. It has fallen from about $1.70 to $1.26. If the UK ratifies the Brexit agreement and moves ahead, we expect a large increase in the value of the pound. In our view, the pound could move up by 20% or more over time. The British market could also become attractive after Brexit is completed.
We are not bullish until China begins to show growth resurgence. Currently, the growth rate in China is slowing; we expect it to rebound but not before mid 2019.
We remain bullish on gold and expect a rise of 10–15% in 2019. Technically, gold is acting better, and fundamentally inflation is rising in several parts of the world — primarily Asia and Latin America.
Cryptos and Blockchain
Under the hood, blockchain and crypto innovation continues. The SEC recently published testimony that Chair Jay Clayton gave earlier this year, in which he said:
“Let me share what I believe may be most exciting about distributed ledger technology – that is, the potential to share information, transfer value, and record transactions in a decentralized digital environment. Potential applications include supply chain management, intellectual property rights licensing, stock ownership transfers and countless others. There is real value in creating applications that can be accessed and executed electronically with a public, immutable record and without the need for a trusted third party to verify transactions. Some people believe that this technology will transform e-commerce as we know it. There is excitement and a great deal of speculative interest around this new technology.”
We continue to believe that although the crypto/blockchain environment remains a “wild west” for now, the regulatory authorities are not fundamentally hostile in the United States. As we have often said, we welcome greater regulatory oversight to remove fraud from the system.
Thanks for listening; we welcome your calls and questions.