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Dollars and $ense—Investor Outlook for 2019

There are several potentially disruptive forces which may continue to subject financial markets to sharp volatility swings in the coming year.
Accordingly, our key investment themes for 2019 will be U.S. monetary policy and how several geopolitical events could impact not only global economic growth but equity market performance.

At its December meeting, the Federal Open Market Committee (FOMC) raised its benchmark interest rate by 0.25 percent to a range between 2.25 percent and 2.50 percent. The hike, which was expected, was the fourth hike in 2018 and the ninth increase since the bank cut its rate to nearly zero during the 2008 financial crisis.

The Fed remains on track to continue with further gradual interest rate hikes, projecting two hikes in 2019 (down from the three hikes previously forecast). GDP growth expectations were lowered for 2019 from 2.5 percent to 2.3 percent and the forecast for 2019 unemployment remained unchanged at 3.5 percent.

In his statement, Fed Chairman Powell offered this assessment of current and future economic conditions: “We have seen developments that may signal some softening, relative to what we were expecting a few months ago,” he said, pointing to “the slowing global economy and increased market volatility that is less supportive of growth. In our view, these developments have not fundamentally altered the outlook.”
He added that “their assessment of risks to the economic outlook are roughly balanced and that the Fed will maintain an emphasis on a data dependent path as we head into 2019.”

Our read on the December FOMC meeting is that a more dovish statement concerning the path of future rate hikes may have been warranted. The 25bps rate hike was expected as was the lowering of economic projections. On Jan. 5, Fed Chairman Powell did just that when he said this, “With the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves and are ready to change course significantly, if necessary.”

The most impactful geopolitical event will continue to be the ongoing trade conflict between the U.S. and China, a conflict which we think may be resolved during 2019. The recent willingness of China to accommodate the U.S. in some areas, such as tariff cuts, safeguards for intellectual property, and increased purchases of U.S. goods is a good start.

The big question now is whether the Trump administration will view these accommodations as enough to get the U.S. to the table and attempt to fashion a broad trade deal. There are significant economic benefits to be gained by both sides and a successful deal would be welcomed by the financial markets.

BREXIT is in a precarious state as a recent deal negotiated between Britain and the European Union appears to have little chance of being approved in Parliament. While many of the technical terms can and will be agreed to, we think there remain enough key issues to hamper the UK-EU relationship for years to come. BREXIT without a finalized withdrawal agreement (a disorderly exit) is a worst-case scenario that will increase market volatility as we approach the deadline of March 29.

We expect that relations between the EU and Italy will remain tense as the eurozone’s third largest economy (after Germany and France and excluding the UK) battles with a public debt problem which has reached €2.3 trillion or 130 percent of Italy’s GDP – above the EU ceiling of 60 percent. In October, the EU rejected Italy’s big spending budget which seemingly ignored commitments made by the previous government and would have necessitated the raising of additional public debt.

Rick Welch is a Registered Investment Advisor (RIA) and chief investment officer of Academy Wealth Advisers. He can be reached at 215-603-2976 or