What about a Yield Inversion? As the Treasury yield curve has flattened, a hot topic is an inverted yield curve and its effects. According to the Schwab Center for Financial Research, an inverted yield curve has preceded every modern recession.

While that may sound ominous, the yield curve has sent false signals before.  The most recent was in June 1998, when despite the curve’s inversion, there was no recession. According to Schwab, the time between an inversion and a recession is far from consistent, ranging from as few as nine months to as many as 24 months.

History shows stock market bump in President's third year.  Things look positive as the economy enters its third year under President Trump. According to Fisher Investments, since the Coolidge Presidency in 1925 through Obama’s second term, the third year of a term has been positive 91.3% of the time, producing an average stock market return of 17.8%.

Economy Slowing, but still positive.  According to the most recent FOMC forecast, the U.S. GDP growth should be 3% in 2018, though it’s set to fall to 2.3% in 2019, 2% in 2020, and just 1.8% in 2021.

The projected slowdown in 2019 and beyond is a side effect of the trade war.

The unemployment rate ends the year at 3.7% in 2018. It should fall to 3.5% in 2019, and rise slightly to 3.6% in 2020, and 3.8% in 2021. U.S. manufacturing is forecasted to increase faster than the general economy. Production will grow 2.8% in 2018. Growth will slow to 2.6% in 2019 and 2% in 2020.

Fed rate hike: how high can it go?  According to Bankrate, policymakers ended a two-day meeting December 19th by voting to raise the central bank’s benchmark interest rate to a range of 2.25% to 2.5%. This is the fourth hike of 2018 and the ninth increase in just three years. In addition to boosting the federal funds rate, the central bank provided updated economic projections, which suggest that there could be fewer rate hikes next year than originally anticipated.

Most members of the Federal Open Market Committee predict that there will be two rate hikes in 2019 rather than the three projected in September. Greg McBride, Bankrate’s Chief Financial Analyst says, “We saw the final rate hike of 2018 today, and maybe the final one for a little while.” He went on saying, “the Fed downshifted their projections of 2019 economic growth, inflation, and interest rate hikes – not in a big way but enough to remove the urgency of repeated rate hikes.”

Consumer confidence remains high, but worries creeping in.  Retail is having its best holiday shopping season in six years, according to early data. Sales in the U.S. from Nov. 1 through Christmas Eve were up 5.1% to more than $850 billion, according to Mastercard SpendingPulse, which monitors spending both in stores and online.

The Conference Board Consumer Confidence Index decreased in December, following a modest decline in November. The Index now stands at 128.1 (1985=100), down from 136.4 in November.

Lynn Franco, the Senior Director of Economic Indicators at the Conference Board stated, “consumer confidence decreased in December, following a moderate decline in November.”  She went on saying, “expectations regarding job prospects and business conditions weakened, but still suggest that the economy will continue expanding at a solid pace in the short-term. While consumers are ending 2018 on a strong note, back-to-back declines in expectations are reflective of an increasing concern that the pace of economic growth will begin moderating in the first half of 2019.”

Impact of the partial government shutdown.  Historically, shutdowns haven’t significantly affected economic output, according to the Wall Street Journal. Despite the first two shutdowns this year, each lasting less than four days, growth later accelerated and the unemployment rate fell to historic lows.  Those gains could be partially attributed to last year’s tax cuts and an agreement to boost federal spending.

Kathy Bostjancic, the head of U.S. Financial Market at Oxford Economics believes, “what would be worrisome is if businesses start to lose confidence in the government.”   She went on saying, “they’ll pull back on hiring, and investment, and it’ll become a self-fulfilling prophecy, where negativity in the stock market turns to negativity in the [broader] economy.”

The last quarter of 2018 has turned extremely negative for investors, erasing the entire year’s gain with the S&P 500 now down 1.2% year-to-date. However, according to Trading Investment, over the 1921-2017 time period, the stock market has generated an average annual return of 7.75%, with 66 up years and 30 down years.

Ultimately, in rebut of the white noise surrounding today’s market, the key for long-term investors would appear to be to remain invested. According to John Calamos of Calamos Wealth Management, “Investors who try to predict exactly when the market will hit its highs and lows may end up capturing far more of the downside than the upside.”

Sources:

“The Fed finishes the year with a fourth rate hike” Amanda Dixon Bankrate, December 19, 2018

“Does an Inverted Yield Curve Portend a Recession?” The Charles Schwab Center for Financial Research, November 9, 2018

“US Economic Outlook for 2019 and Beyond” Kimberly Amadea, The Balance, December 19, 2018

“Retail is having its best holiday season in 6 years” Lauren Thomas, CNBC, December 26, 2018

"Consumer Confidence Survey" December 27, 2018

“Markets Are Already Volatile. A Long Shutdown Could Make It Worse” Sharon Nunn, The Wall Street Journal, December 27, 2018

“Stock Market Outlook 2018:IV” Fisher Investments

“Stock Market Yearly Historical Returns from 1921 to Present: Dow Jones Index”, Kamal Khondkar, Trading N investment, January 20, 2018

“How to Respond to Market Volatility” John P. Calamos, Sr., Calamos Investments, February 6, 2018