In good times and bad, Wall Street has to have a story — a clear, concise view of the economy and markets and how you, our valued client, can make money by trading with us.
As we limp into 2019, about the most upbeat line the pros can spin is that, hey, a recession probably won’t hit until next year. Otherwise, most agree that the growth rate for the US economy and corporate earnings will weaken, financial markets will continue to be volatile, and investment profits will be much harder to find.
Just how much harder?
Bloomberg reporters sifted through dozens of Wall Street research notes and provided a Reader’s Digest version of the key takeaways.
Morgan Stanley has one of the gloomier outlooks:
“We think the bear market is mostly complete for emerging markets, has further to go in U.S. credit and is about to begin for the dollar. We remain neutral equities, underweight credit, neutral government bonds and overweight cash.”
Translation for the average investor: Lay low, and put money in safe certificates of deposit or under your mattress.
State Street Global Advisors tries to find a silver lining:
“Slower global economic growth, higher volatility, less accommodative monetary policies and falling earnings likely mean lower returns. However, the risk of a recession, particularly in the U.S., remains quite low.”
Its advice: Some solid companies might get cheap enough to make them a reasonable bargain. Maybe.
So as you open up your year-end retirement plan statement — if you have the stomach to look — it’s reasonable to wonder how painful 2019 will be. That’s impossible to know right now. There are too many economic and political uncertainties out there to confidently assess whether we’ll get a “soft landing” — a gradual slowdown but no recession — or a more damaging contraction.
Here’s a subjective and incomplete list of questions (all interrelated) that we need more clarity on:
■ Will consumer confidence hold up? The Conference Board’s consumer confidence index fell slightly in December, but it remains at a level not seen since just before the 2001 dot-com recession. Because consumer spending accounts for about three-quarters of the US economy, a sharp deterioration in confidence would spell trouble. But some decline should be expected, given the stock market sell-off and the prospects for slower growth.
■ How cold will the housing market get? In Boston, as in many other markets around the country, home prices are rising, but at a slower pace than in the first half of 2018. Inventories remain tight. If you start getting a lot more price-drop alerts from Zillow, be prepared to hunker down. There is a bright spot: Mortgage rates have fallen to an eight-month low.
■ Can the United States and China reach a trade deal? The tariff war has spooked investors and hurt US farmers and companies. A successful resolution would provide a big boost to the market. On Monday, word that Chinese and American negotiators were talking again was enough to help stocks move higher. The Dow Jones industrial average gained 98 points, or 0.4 percent, to 23,531, while the S&P 500 rose 0.7 percent and the Nasdaq Composite added 1.3 percent.
■ Will Special Counsel Robert Mueller’s investigation of President Trump reveal any impeachable offenses? David Leonhardt of The New York Times wrote a long Sunday opinion piece arguing that Trump is unfit for office. But it seems unlikely that Congress would move against the president if Mueller’s probe finds no significant wrongdoing. But if Mueller finds a smoking gun, and the Democrats push to remove the president from office, we could find ourselves in a destablizing constitutional crisis.
■ Will rising wages lead to a reduction in job creation? The blowout December payroll report on Friday (312,000 new private sector jobs) was accompanied by a 3.2 percent gain in average hourly wages over last year. That was the biggest jump in wages since the financial crisis, and good news for workers, who have not fared nearly as well as investors during the long expansion. But if wages start climbing too quickly, the Federal Reserve may get antsy and raise interest rates again, a move that tends to hurt stocks.
■ And, speaking of the Fed and interest rates, can it successfully pursue its primary mission — keeping inflation low and employment high — without inadvertently pushing the economy into a recession? It’s a difficult tightrope to walk, but Fed chairman Jerome Powell, after sending conflicting signals, last week made his position clear: While the central bank expects to raise its benchmark federal funds rate twice this year, it will be flexible, acting only if the data warrant tighter credit, not following a predetermined path to bringing rates back to more normal levels.
But there is only so much reassurance the Fed can offer. It has erred in the past — most recently by keeping rates too low for too long, leading to the housing bubble — and Powell is new and hasn’t won the trust of investors, as his most immediate predecessors did.
And, most important, it’s not the Fed’s job to make sure the markets keep going up. Ben Bernanke, who served as Fed chairman from 2006 to 2014, told a conference over the weekend that, in the grand scheme of things, the current correction isn’t so catastrophic as to require special intervention.
Looking back at the financial crisis of 2008-2009, he said that “what we’ve seen in the last year, I hate to tell any investors here, this is not all that huge.”