"Kee" Points with Jim Kee, Ph.D.


  • Quick 2019 Outlook
  • A Challenging First Quarter


2019 Outlook

A good way to think about the stock market going forward is that it prices what is known, and that the gains or losses for the year tend to reflect that balance of negative and positive shocks that will occur over the ensuing 12 months. In that sense, I’m a little more optimistic for 2019 than 2018, largely because valuation levels (i.e. expectations) are lower than they were at the beginning of 2018, and I think that the negative shocks that were headwinds in 2018 could become positive shocks - tailwinds - for 2019. For example, the trade war ratcheted up in 2018 (that was the biggest negative shock), but trade resolution seems the better bet this year. China (and Europe for that matter) has experienced slowing growth, and that increases the odds of coming to the table more open to negotiations (Milken Institute; Knowledge@Wharton). A positive outcome in the US/China negotiations would be for China to agree to purchase more US goods, and to cede some ground on intellectual property rights. And the Federal Reserve was resistant to altering its course as global growth slowed in 2018, but it has signaled a much more cautious tone moving into 2019.


A Challenging First Quarter

But, the first quarter could be somewhat challenging, and that could well manifest itself in continued stock market volatility. Tariff hikes (from 10% to 25%) were suspended for 90 days beginning on January 1, so there will no doubt be a lot of back and forth on trade during the quarter. And some clarity on Brexit will have to occur before the March 29 deadline, which might include a plea by British Prime Minister Theresa May for an extension that would have to be agreed upon by EU authorities. First quarter numbers are typically low anyway, and the impacts of the government shutdown should help ensure that to be the case this year as well. Current forecasts like the Atlanta Fed’s GDPNow are estimating first quarter growth at 2.7%. But a recession for 2019 does not seem to be in the cards, just a slower rate of expansion in the US (closer to 2% than last year’s 3.1%), with global growth expected to be in the 3%-3.5% range. The government funding that ended the shutdown is only good through February 15th, at which point another shutdown could occur unless an agreement is reached between the President and Congress. Trump has threatened to declare a national emergency in order to fund “the wall,” a move with little broad-based support and of questionable legal legitimacy. My hunch, based upon no facts other than a re-reading of his first book, The Art of the Deal (1987), is that I wouldn’t put it past him. Finally, an interesting fact on the current, tight labor market (unemployment rate=3.9%) is that most of the hiring taking place now is in small businesses rather than corporations, a reversal of the trend during most of this expansion.