It is not just the stock market that is having a wobble — firms are asking if now is the right time to be investing in new capacity or raising production.
2018 was a stellar year for the U.S. jobs market, but recent figures suggest part of that may have been the sugar rush of the president’s tax breaks.
That effect is beginning to wane now. Investors are looking at slowing growth in China and Europe, trade wars and a shaky U.S. housing market and asking: what does 2019 hold?
A New York Times article is robustly upbeat, reporting Labor Department data showing December was one of the strongest months of job gains in the last decade, with employers adding 312,000 to payrolls. After years of slow wage growth, the tightness of the labor market may finally be influencing wages, which the article states also showed impressive gains at 3.2% year over year. Unemployment is exceptionally low at 3.7%, yet inflation has remained benign.
Some would suggest the economy is in Goldilocks territory — growing not too fast and not too slow.
So why did the stock market crash in December, posting its worst monthly loss since the financial crisis and the worst December since 1931 and the Great Depression (as another article by The New York Times states)?
It would seem investors took fright at a number of converging factors. Those factors included the Fed’s raising of rates in the month (when many thought they had tightened enough already in 2018), the still unresolved trade war with China and weak housing market data.
All of that is leading many to ask if the bull run come to an end.
Stellar employment numbers and reassuring words from Fed Chairman Jerome Powell calmed fears and the market promptly bounced back — but for how long?
James Stack, president of InvesTech Research, is quoted by The New York Times as saying stock markets often lead the wider economy by many months. His expectation is wider growth will falter in the next 1-5 months and sees stock markets down 20% this year.
He is not alone.
CNBC says stock markets often precede a recession in the wider economy by eight months on average. But here’s the twist: that’s not always the case.
Since World War II, there have been 13 bear markets. They were followed within a year by a recession just seven times. As a predictor of recessions with just 54% accuracy, bear markets are hardly an accurate predictor.
One factor to consider will be Fed tightening.
After four rises in 2018, the Fed has indicated it will ease up in 2019. They had been predicting four more 0.25% rises this year, but now that looks less likely.
Another factor will be wider global growth, and here the news is not so good.
China, the engine of global growth since the financial crisis, is slowing markedly despite efforts by Beijing to stimulate a recovery. Bank lending rates have been relaxed, and according to CNBC, the Chinese central bank injected a net 560 billion yuan ($83 billion) into the banking system — the highest ever recorded for a single day.
Slowing demand and a reaction among consumers against the trade disputes with America have already forced Apple, among others, to reduce forward earnings projections for 2019, the first such reduction for Apple in 16 years.
After bumper corporate profits in 2018, many U.S. companies will be projecting lower earnings in 2019 as the impact of sharply risings costs due to import tariffs and a slowdown in major export market China hit a variety of industrial sectors.
Europe, too, is slowing down.
Last month’s numbers from Germany suggest the economy could soon be contracting. According to the Financial Times, 1.5% growth in 2018 was the slowest since 2013. The engine room of Europe’s economy has been hit hard by the trade dispute with China and slowing Chinese growth.
Car sales are down a fifth in China and Germany has been a major beneficiary of Chinese luxury auto demand. Germany is a major exporter — as a percentage of its GDP, the largest of any major economy at 47.2% — so when global growth slows, and it is forecast to drop to 3% this year, Germany feels it more than most. If Germany falters, so does the rest of Europe.
But all is not gloom and doom, and a recession is by no means a certainty.
A resolution to the trade dispute with China would lift sentiment. Settlement of the U.S. government shutdown would inject funds back into government employees’ pockets, creating a welcome fillip to an otherwise depressed start to the year.
U.S. growth is still positive — strong even, by global standards — but it is not beyond being dragged down by China and Europe. Watch those PMI numbers month by month, expect considerable volatility in the stock market and, if it goes bear, watch U.S. autos.
The housing market is depressed — autos could be next.