While federal initiatives in 2018 provided a tailwind for markets, 2019 policies could add to uncertainty and risk.
Markets have stabilized so far in January as investors seem to be realizing that December’s stock market slide was probably excessive. The S&P 500 is up 3.5% so far this year and more than 10% from the Christmas Eve low.
As I wrote last week, recession in 2019 seems unlikely. Federal Reserve policy and economic fundamentals aren’t flashing warning signs. The business cycle is aging and markets remain vulnerable to uncertainty, but valuations of many stocks have become attractive.
Will this more benign environment last? It could, but I see Washington policies as the biggest wild card that could unsettle markets near term. Disruptions from Washington could weigh heavily on consumer sentiment and strong consumer spending could be key to the health of U.S. markets this year.
Below are three policy areas that could concern consumers and markets in the weeks to come:
- Government shutdown: So far the impasse has been viewed by investors as political gamesmanship and hasn’t had much impact on markets. But the longer it goes on, the more it could hurt the economy and consumer confidence.
- China trade deal: The outlook on trade negotiations looks more positive as the March 2 deadline approaches, but some damage has already been done. Supply chain disruptions and profit pressures on major consumer electronic companies will take time to improve and could worsen if trade tensions flare once again.
- Oil sanctions: The U.S. surprised markets by temporarily lifting oil sanctions on Iran last year. More unanticipated policy shifts could again roil markets. Stability in the Middle East is tenuous and U.S. policy in Syria, Iraq and Afghanistan is particularly unclear right now.
These policy risks may all be resolved without major issues, but my expectation is that political uncertainty will remain elevated all year. Given that, I don’t see stock valuations recovering to the prior highs. In an environment of slowing growth and increasing debt and deficits, the price of missteps in Washington could be costly.
My recommendation is for investors to diversify their portfolios by buying non-U.S. stocks. For the portfolios we manage, we’re emphasizing emerging markets, Japan and Europe. These regions could benefit from China’s recovery and an improvement in trade relations. Outside the U.S., the impact of turmoil created by Washington policy choices will likely be at least somewhat muted.