Despite numerous headwinds, 2019 is gearing up to be a celebratory year with record-breaking achievements on many financial and economic fronts. The U.S. economy and various financial markets are poised to achieve historic milestones, some set to take place in the upcoming quarter. The U.S. is the beacon of the global economy, with positive growth expected for the year.
When investing beyond the borders of the United States, emerging markets have stolen the spotlight as of late. In short, their scope for population growth and urbanization provide them the most potential to “catch up” to their wealthier, developed counterparts. The biggest impact on much of northern Europe’s economic growth rates in 2019 rests on broader concerns. A pragmatic Brexit outcome would be a boost for everyone given the high levels of trade between the United Kingdom and the rest of the European Union. This is the likely outcome. Do not be too worried about the populists. Their rising popularity may just be the nudge more conventional politicians need to really step up and inspire. Europe’s biggest issue in 2019 is belief. Investors struggle to see a way through. The perception remains that both the ECB and incumbent governments are out of ideas. However, dig a little below the surface and Europe is not without hope.
Economic data is critical to the financial markets. It helps to drive earnings expectations and is a key factor in Federal Reserve policy decisions. However, economic figures are noisy and reports often conflict with one another. How do we make sense of it all? There are currently two major sources of uncertainty in the economic data: statistical error and seasonal adjustments. The government does a good job with seasonal adjustment, but it’s difficult to get it exactly right. For those using the economic data, uncertainty means one should take any reported number with a grain of salt. It’s best to look at a three-month average, which reduces much of the noise (but does not eliminate it) and is a better gauge of the underlying trend. The Fed pays a lot of attention to the anecdotal evidence. However, its main focus is on the job market and inflation. Based on the demographics, job growth in recent years has been well beyond a long-term sustainable pace. That’s not a problem in the short term. The market focus should eventually get back to the economic data. Yet, the markets often use the economic data as an excuse. What’s more important is how the data fits into the overall narrative.
One of the biggest debates taking place currently is with investors and their focus on the President’s willingness to threaten actions that could have significant economic and market consequences versus his repeated use of the stock market and economy as a gauge of his success. The congressional spending package was seen as politically damaging for the President because it did not deliver the win he sought on border security, prompting a national emergency declaration. It is expected that China trade headlines and the interplay with domestic politics will remain in focus for the foreseeable future, even with an initial deal struck.
Fiscal stimulus boosted GDP growth in 2018, but the impact was widely expected to fade in 2019, leaving growth at a more moderate pace (consistent with the longer-term labor force demographics). Consumer spending weakened unexpectedly in December, with only a partial rebound in January. The partial government shutdown led to the postponement of several important data releases. More importantly, the spring economic data is going to tell the tale on the job market, housing, and business investment.
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