2019 Economic & Market Outlook Fisette Financial Services, LLC - - PowerPoint PPT Presentation

Fisette Financial Services, LLC

963 NE Discovery Drive, Issaquah, W A 98029 (425) 507-9004

January 18, 2019

2019 Economic & Market Outlook

Gross Domestic Product

Consumption (68%) + Investment + Govt + Net Exports

1947-2018 Average 3.2% Q1 2018: + 2.2% Q2 2018: + 4.2% Q3 2018: + 3.5% Q4 2018(e): + 2.8%

Source: Federal Reserve Bank of St. Louis

Truck Tonnage

Topped out well in advance of last 2 recessions (shaded areas)

Source: Federal Reserve Bank of St. Louis

Source: Tradingeconomics.com

Institute for Supply Management Manufacturing Business Activity Index

Dec 2018: 54.1 Good, but 5 point drop in December Above 50 indicates expansion Usually peaks 35 months prior to recession (59.8 Sep 2018) Could it be to “beat the tariffs?”

Institute for Supply Management Service Sector Business Activity Index

Source: TradingEconomics.com

Dec 2018: 57.6 Strong, but

• ff the high

Above 50 indicates expansion

Low Unemployment Rate: 50-year Low in Nov 2018!

5.8% 37-year average 3.9% Dec 2018

Source: U.S. Bureau of Labor Statistics

Initial Claims for Unemployment 17-Year Low

Dec 2018 218,750

Source: U.S. Emloyment and Training Administration

659,250 March 2009

Labor Force Participation Rate

% of civilian population 16 and older in the civilian labor force. 63.1%

Dec 2018 5-year high

People are finally starting to reenter the work force

Source: Bureau of Labor Statistics

62.4%

Sep 2015 41-year low

Job Openings (JOLTS)

There are approximately 1,000,000 more job openings than there are people in the labor force to fill them.

Source: U.S. Bureau of Labor Statistics

Factory Unemployment Rate: Did you Believe the Robots Were Taking All the Jobs?

2.8% Dec 2018

Source: U.S. Bureau of Labor Statistics

Mean 5.9%

LEADING ECONOMIC INDICATORS

1.41 Oct 2018 37-yr Avg 1.29

Source: Federal Reserve Bank of St. Louis

• Univ. Of Michigan Consumer Sentiment:

Very Healthy… Very Important!

90.7 Dec 2018 Mean 86.1%

Source: University of Michigan / Federal Reserve Bank of St. Louis

Small Business Optimism Index

104.8 Jan 2019

Source: National Federation of Independent Business (NFIB)

2016 Election

Federal Debt – But Sadly, Nobody Cares

Source: Federal Reserve Bank of St. Louis

$21.5T

July 1981: $1T

Federal Debt as a Percent of GDP

Source: Federal Reserve Bank of St. Louis

104%

Federal Deficit as a Percent of GDP

Source: Federal Reserve Bank of St. Louis

3.4% 9.8% 2009

It’s going to get worse as population ages and interest rates rise.

Corporate Debt as % of Market Value

Source: Federal Reserve Bank of St. Louis

51% 1994 38% Q3-2018

Federal Funds Rate

Controlled by Federal Reserve Overnight Lending Rate (Bank-to-Bank)

Source: MacroTrends

2.40% Dec 2018 Mean: 4.82%

10-yr Treasury Rate in 2018

Start: 2.58% Low: 2.40% High: 3.24% End: 2.69%

Mean: 4.59%

Source: www.multpl.com

NOT controlled by Federal Reserve 30-yr fixed rate mortgages are based

• n 10-yr Treasury

rate

10-Year vs. 3-Month Treasury Yield

We want this to be a positive number; else, “inverted yield curve.”

Source: Federal Reserve Bank of St. Louis

0.31%

Inflation? Not a Problem.

Source: BLS, Factset, JP Morgan Asset Management

Tightening Labor Market … But Where’s the Inflation?

Source: Federal Reserve Bank of St. Louis, BLS

2.0% Q3-2018 3.3% Mean Since 1960

U.S. Dollar Strengthens 5% in 2018

Source: Tradingview

Wild swings, but trendless over 43 years

Bad for Multinational Companies & International Stocks and Bonds We Own

Earnings Drive the Stock Market

S&P 500 Operating Earnings

• 2014:

$113 (+ 5%)

• 2015: $100 (- 12%)
• 2016: $106 (+ 6%)
• 2017:

$125 (+19%)

• 2018(e): $162 (+29%) [but stocks fell!]
• 2019(e): $170 (+5.2%)

Source: S&P Dow Jones Indices; Federated Investments, Raymond James

Volatility Index (VIX) - A Measure of Fear

Source: Marketwatch.com

Dec 24, 2018 Feb 5, 2018

“When VIX is high, it’s time to buy. When VIX is low, it’s time to go.”

Dec 21 rebalance

Secular Bear Markets (10-12 years)

Second Machine Age 2011 secular bull market began

Secular Bull Markets (16 – 18 Years)

Source: JP Morgan Asset Management

2019 – Rough Year, but…

Source: JP Morgan Asset Management

We’re Still in a Secular Bull Market

Annual Returns & Intra-Year Declines

Source: JP Morgan Asset Management

• 20% = Bear Market

International Stocks Have Lagged Since 2009

U n d e r p e r f

• r

m a n c e

But Valuations are More Attractive

Source: JP Morgan Asset Management

Industrial Revolution 3.0 / Second Machine Age

• Companies are structurally more efficient,

substituting technology for labor and capital.

• Result: Double-digit profit growth from low

single-digit revenue growth.

• Technology companies require very little

plant, property & equipment.

• Artificial intelligence
• Robotics
• 3D printing

Source: Federated Investors

Industrial Revolution 3.0 (Cont’d)

• Implications:
• Labor market requires higher skills
• Disinflationary; e.g., Amazon.com
• Less pressure on interest rates, as there is

a lesser need for capital

• Increased productivity
• Critical if we are to grow with an aging

population and reduced immigration.

• McKinsey & Co. predicts productivity

from automation over the next 50 years will be 4 – 5 times the steam engine 100 years ago.

Source: Federated Investors

Labor Productivity

Source: U.S. Bureau of Labor Statistics / Federal Reserve Bank of St. Louis

Raymond James’ 2019 Outlook

GDP Growth: 2.6% Earnings Growth: 5.2% (consensus expectation is 8.3%) Inflation: 2.3%

Source: RJ Portfolio & Technical Strategy

What We Expect in 2019

• Continued global expansion, albeit slower than 2018
• Growth slows, but no recession
• 0 – 1 Federal Reserve interest rate hikes

– The Federal Reserve continues to sell mortgage securities it bought in 2008/2009, which in effect is the same as raising interest rates, albeit at a slower rate.

• Declining inflation
• Little change in interest rates
• A significant increase in stock prices
• Stocks are less risky AFTER the 20% decline.

Raymond James Chief Equity Strategist Jeff Saut Jan 4, 2019 “Morning Tack” Closing Sentence

–“If you want to catch a wave, you have to grab a surfboard and get into the water.” Ladies and gentlemen, we are at the point where you need to “grab a board” and get into the water!”

Marty Zweig (1942-2013) Famous Contrarian and Wall Street Guru

“Don’t fight the Fed!”

Fed Chairman Powell Jan 4, 2019

"Particularly with the muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves."

Source: American Economic Association in Atlanta

Our 2019 Concerns

• The Federal Reserve overdoes interest rate

hikes, and hurts the economy.

• Consumer confidence fades because of the

stock market selloff Oct – Dec 2018.

• China trade war escalates.
• Mueller has the goods on President Trump, but:

– Very unlikely Senate would indict (needs 60 votes) – Even if Senate indicted, Pence would continue policies in a calmer manner.

Save the Date July 13, 2019 Client BBQ in Carnation

• The information contained in this report does not purport to be a complete description of the securities, markets or

developments referred to in this material.

• The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing

material is accurate or complete.

• Any information is not a complete summary or statement of all available data necessary for making an investment

decision, and does not constitute a recommendation.

• Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon

before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

• Commodities are generally considered speculative because of the significant potential for investment loss. Commodities

are volatile investments and should only form a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when prices overall are rising.

• International investing involves additional risks such as currency fluctuations, differing financial and accounting

standards, and possible political and economic instability. Also, investing in emerging markets can be riskier than investing in well-established foreign markets. There is no assurance any of the trends mentioned will continue in the

• future. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal.
• Specific sector investments, were companies engage in business related to a particular industry, like technology, are

subject to fierce competition, the possibility of their products and services being subject to rapid obsolescence and limited diversification.

• Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to

maturity, you may receive more of less than your initial investment. Holding bonds to term allows redemption at par

• value. Bond prices and interest rates have an inverse relationship.
• Any opinions are those of Michael & Erica Fisette, and not necessarily those of RJFS or Raymond James.
• "The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S.

stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

• The Down Jones Industrial Average (DJIA) is price-weighted average of 30 significant stocks traded on the New York

Stock Exchange (NYSE) and the NASDAQ.

• Dividends are not guaranteed and must be authorized by the company's board of directors.
• There is no assurance any of the trends mentioned will continue or forecasts will occur.