The Federal Reserve has been raising interest rates because they say the economy is strong. But how strong is it? The evidence is mixed.
On the plus side, unemployment sits at 3.7%, a historic low. And this holiday shopping season was the best in six years, with retail sales up 5.1%, bringing in more than $850 billion. Corporate earnings were also very healthy, rising 20% for the year.
But even with all this good news, the S&P 500 finished 2018 down 4.38% (if dividends are included), and it had the worst December since 1931. That is a far cry from the 9% gain the index showed for the year-to-date back in September.
So what will 2019 bring?
Some signs are positive. Historically, the stock market rarely has two negative years in a row. A CNBC survey of Wall Street strategists found that most have a positive view of the coming year’s performance. It won’t be a straight upward climb, though—we can expect to see large swings in both directions.
On the negative side for the economy, the U.S. stock market can sometimes be a forward indicator, and it has been in decline over the last three months.
While the market expected the Fed to raise rates by 0.25% in December, it did not like the fact that they left the door open for two more potential hikes this year. Higher interest rates can make the economy soften. But even with the rate hike, the yield on the 10-year Treasury dropped from a high of 3.25% in 2018 to its current rate of below 2.7%. This leads some to believe that the Fed might not raise rates this year after all, especially if stocks continue to decline.
Another catalyst for this volatile market is the trade outlook. Almost every other day we hear we are close to a trade deal with China or some other country, only to get whipsawed when news reports say negotiations are off. March 1 is the new deadline for a deal with China. If it doesn’t happen, we will likely see a continuation of the current tariffs.
While it is impossible to know what the market and the economy will do in the short term, we do know that reacting to headline news, instead of following your investment strategy, can hurt your long-term returns.
For more information, see this CNBC article on what to expect in the markets in 2019.