We’ve had a rough start to the new year so far. And after such a volatile 2018, it’s hard to predict where things will land in 2019.
Investors do have reason to be optimistic this year—the economy is still relatively strong—however, the trends that made the end of last year so challenging remain and investors are still in panic mode.
But a new year comes with new risks. Here’s what you need to keep an eye on this year.
Political Turmoil
When financial markets are in trouble, Wall Street usually turns to Washington for help. But this time, dysfunction in Washington is what has thrown investors for a loop.
“Normally you would expect Washington to be the cure, then you’re remembering they are the cause,” said Sam Stovall, chief investment strategist at CFRA.
The Fed’s interest rate policy has taken a lot of criticism, with President Trump tweeting that “the only problem our economy has is the Fed.” Then came the government shutdown that has concerned investors worried that the impasse over a border wall could portend bad news for an upcoming debt ceiling showdown, which if talks on that fail, the government could default on its debt.
The last time America got close to that happening back in 2011, Standard and Poor’s downgraded the country just below a perfect AAA rating. If we get another downgrade, it could make our massive debt load even more costly to pay back.
The trade war is still looming over investors as well. “As the market continues to worry about a recession, the implications of a trade war with China and unpredictable and adverse political decision-making from the White House, we are going to continue to see volatility,” said Chris Zaccarelli, chef investment office at Independent Advisor Alliance.
Global Economic Slowdown
Apart from political turmoil, another thing that has spooked investors of late and will continue to do so this year is a looming global economic slowdown.
For months now, some of the biggest names on Wall Street have been saying that a recession is around the corner and would begin in 2020. But the rate at which markets have been crashing lately is pushing up the clock on when the next recession will start, with many now saying that it will be this year.
In the second quarter of 2018, the U.S. economy was growing at an annual rate of 4.2%. In the third quarter, 3.4%. The Fed believes that this year, the pace of economic expansion will slow to 2.3% this year.
China’s economy is slowing down as well, after decades of incredible expansion. For China, growth for last year is likely to be the weakest since 1990, and 2019 could be even worse.
And then there’s the U.K., where Brexit could quickly derail the country’s economy.
Slowing Earnings Growth
Just as a global economic slowdown has been spooking investors, so too has slowing earnings growth.
It’s expected that this year’s earnings will grow at a slower pace than they did in 2018.
Last year, profits rose 23% as the newly passed tax cuts gave companies a good jolt. But that high has worn off, and 2019’s growth won’t be nearly as impressive by comparison. In fact, Wall Street projects profit growth of less than 10% this year.
Now, the S&P 500 is currently trading around 14.5 times expected earnings for 2019, that’s below the historical average of 16 times earnings, which could mean a comeback in stocks is on the way. It’s also true that the range between last year’s best sector—health care, which rose only 5%—and last year’s worst, energy, which fell 18.5%, is usually a good sign for the following year’s market.
“Should history repeat, and there’s no guarantee it will, this year’s lump of coal could metamorphose into an unanticipated gem,” said Stovall.
But even if stocks do rally, it’s unlikely enthusiasm will last especially considering the other risks the market is facing this year.