2019 Outlook: Divergent Variables

By Ron Insana, CNBC Senior Analyst and MB Contributor

What variables have the potential to dominate investor psychology in 2019?

The views and opinions expressed in this article are solely those of the author and do not represent the views of MB Financial, its Board of Directors, employees or shareholders.

It’s rare that Wall Street suffers two down years in a row, but we’re living in a world where "rare" has become commonplace. There’s no need to discuss examples of the unusual and uncertain times in which we live…we get daily doses of that in the 24/7 news cycle. Having said that, there are elements of those top news stories that will most likely dominate investor psychology in 2019.

The Federal Reserve tops the agenda for the coming year, as the great debate intensifies over when (or whether) the central bank will need to cool an economy that, until recently, was running quite hot. Indicators that measure the economy today remain quite strong. But measures of future growth, like the ISM Purchasing Managers survey and measures of business confidence, show the economy may slow noticeably in the relatively near-to-intermediate term.

Indeed, so-called exogenous events like trade wars, political populism and anti-immigration sentiment could provide negative risks for economic growth, not to mention that growing geopolitical risks rising from Caracas, Venezuela, to Damascus, Syria, to Pyongyang, North Korea could prove to be problematic.

While there are no “plug-and-play” models useful for 2019, it’s hard to successfully maintain a multi-variable spreadsheet; it appears that the current headwinds may be more forceful than the prevailing tailwinds…with one caveat.

If the domestic and global economies slow so much that the Federal Reserve is forced to do more than just pause its rate-hiking cycle and cut interest rates, we should see a big rally in stocks and a less severe growth recession than some, myself included, are currently anticipating. Having said that, my base case for the U.S. economy in 2019 is for growth to slow to 2%, or below, and the world economy to slow even more than that.

My colleague Greg Ip at the Wall Street Journal has written about the Fed trying to engineer a “soft landing” for the U.S. economy in which growth slows, but not so much so that it slips into recession or derails consumer spending. It’s been tried many times before with little success. If, indeed, the Fed is done entirely with its current rate-hiking cycle, one can argue the central bankers may pull it off, assuming other central banks around the world follow suit.

One Chinese economist recently suggested that the Chinese economy has not only slowed but may actually be contracting in real terms. Japan has been printing negative GDP numbers, along with Germany. With three of the four biggest economies in the world effectively at or near recession, it is hard to imagine an environment in which the U.S. grows above potential.

China’s central bank is easing, but it remains alone in that regard among the world’s biggest central banks. And while China is also spending more on infrastructure to stimulate its economy, one must wonder if it will matter, given China’s vast quantities of vacant housing, idle capacity and extraordinary levels of debt. Much of the same can be said of the remainder of the world, including the U.S., which will be running trillion-dollar deficits, leaving very little room for fiscal stimulus should the economy slow.

Immigration policy is also a major headwind in the U.S., given the shortage of available workers here at home. The border “crisis” notwithstanding, plans to reduce legal immigration by half and restrict H1B visas for highly skilled workers could keep the American economy from reaching its full potential. Remember, the basic equation for growth is: Labor force growth + productivity growth = GDP growth. Without comprehensive immigration reform, given that this nation’s birth and population growth rates are at 70- and 80-year lows respectively, economic growth simply cannot accelerate meaningfully from its current pace. 

Divided government is also unlikely to be supportive of pro-growth policies, especially in an off-election year. That leaves me with little room for anything but forecasting a muddle-through year for the economy and a volatile year for financial assets. It’s hard to be much more specific than that because I’ve never seen so many divergent variables appear on the so-called event horizon in my nearly 35-year career.
The views and opinions expressed in this article are solely those of the author and do not represent the views of MB Financial, its Board of Directors, employees or shareholders.

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