By Chris Oerman

2018 turned out to be a lackluster year for the equity markets after an unprecedented nine quarters of earnings growth and a historic bull run dating back to 2011. All of the major indices had flat or negative returns for the year, and it’s been hard to find any sort of growth out of equities with consumer discretionary, healthcare, and utilities – typically viewed as defensive sectors – leading the way (and barely clinging on to positive returns).

After nine straight quarters of accelerating earnings growth, we started to see a shift in Q4 2018, with the equity markets falling from their highs in October. We expect this trend to continue into 2019 as the global economy continues to slow.

The U.S. dollar went on a bullish tear in 2018 as it reinforced its role as the world’s reserve currency. We’ve seen inflation slow as a consequence of the strong dollar. Further evidence of a strong dollar includes the U.S. commodities index declining more than 7 percent for the year, crude oil dipping below $50 per barrel after rising to $70 just a few months earlier, and foreign currencies underperforming compared to the dollar.

If the Federal Reserve decides to turn dovish in 2019, we could see the dollar fall from its recent highs versus foreign currencies and an acceleration in inflation, which means consumers could see goods become more expensive in 2019.

In 2019, we may find a resolution to the tariff war with China, especially if both countries become desperate. To put things in perspective, the U.S. equity markets are down 13+ percent from their September highs while the Chinese markets are down 20+ percent from their 2018 highs. A tariff resolution may result in a short term boost to the equity markets, but it is yet to be seen if the effects will have an impact on long-term growth.

We may also hear more about bonds and corporate debt in 2019, as a rise in fear over the accuracy of bond ratings and credit quality among some of the U.S.’s major corporations could become more prominent in the media. In the event of an economic downturn, we could see some BBB-rated corporate debt downgraded to high-yield, with the fear of a negative impact on some of the world’s largest bond funds and ETFs.

With the volatility currently seen in equity markets, we should be cautiously optimistic for 2019. U.S. companies are healthy, but we’ve seen Wall Street take a “shoot first, ask questions later” approach many times in the past. Meanwhile, interest rates and the credit yield curve should continue to be closely monitored.

Western Growers Financial Services would like to wish everyone a prosperous new year.