The stock market has been volatile and ended 2018 badly as the worst year in the last ten. Has the market gotten the jitters out of its system or is more trouble in store? What are the investment risks for 2019 and how can you prepare your investment portfolio?
Investment Risks for 2019
- The trade war will continue and get worse.
- Interest rates will rise excessively due to the Federal Reserve.
- The global and U.S. economy will slow down.
- As a result the stock market will continue to be volatile and experience losses.
Investment Risks for 2019 from the Trade War
The deficit that the USA runs with China and the world in general is not supportable. As such something needs to be done to staunch the monetary bleeding from the US treasury and pocketbooks. Likewise, the steady loss of US intellectual property and technical secrets cannot go on without the USA losing its dominant position in the world power structure.
Thus the USA should not give in easily in order to resolve trade negotiations with China. A few months ago we looked at what happens to your investments if the trade war becomes permanent. As we noted in that article, China wants to move to a more dominant and secure position on the world stage. They have bitter memories of having been forced “inward” during the period of European colonial expansion. And, the Chinese Communist Party intends to stay in power, for which they will need to maintain economic growth and social stability.
The key to this situation is that neither side wants to give way. As such the trade war may be protracted and economically damaging. This is one of the distinct investment risks for 2019 and beyond. A slower global economy with effects on both China and the USA could damage investment prospects across the board.
Investment Risks for 2019 from a Too-aggressive Federal Reserve
When the markets tanked in 2008 and 2009 the USA and the world were on the brink of another Great Depression. Two of the measures that saved the day were instituted by the U.S. Federal Reserve. First of all they dropped interest rates to almost nothing. Second, they instituted quantitative easing in which the Fed purchased U.S. Treasuries and corporate bonds with their own funds. This was equivalent to printing money and served to inject funds back into the financial system to replace part of the $7 Trillion or so in value that was lost in the real estate and stock market crashes.
Back when we wrote the article there was concern about the Fed tapering off their quantitative easing campaign too quickly. They are, in fact, steadily reducing the size of their bond and treasury portfolio by letting the bonds expire. And, the Fed has been slowly but steadily bringing interest rates back up to more normal levels as justified by economic growth. The concern for 2019 is that the Fed will be too aggressive and with an extra rate increase or two cause a recession.
We recently looked at how higher interest rates will affect your investments. The affect will be three fold. First, the value of your bonds and treasuries will go down as rates go up. Second, you will gain a higher interest rate on bonds and treasuries in the future. Third, the steadily increasing cost of servicing the huge American debt will choke off investment, infrastructure improvements, and the US economy.
Investment Risks for 2019 from an Economic Slowdown
The driver of the stock market for the last decade has been continually impressive earnings. But, how can earnings continue to go up when people start saving their money instead of spending it. We just saw how the market reacted to Apple announcing that iPhone sales are slipping in China. Intrinsic stock value is dependent on forward-looking earnings. Whether it is Apple selling iPhones or the Chinese industrial complex churning out products for the world, the production of products needs to match the size of the market. And the ability of the market to pay for these products need to keep up. Otherwise, prices or production need to fall. This is why markets tend to have boom and bust cycles. Other factors like the trade war and interest rates aside, investment risks for 2019 include an aging bull market and economic boom in need of a reset.
Risks Associated with a Volatile and Falling Stock Market
There will be two risks this coming year associated with both volatility and a falling market. One is that if you don’t get out of investments soon enough you will lose a lot of money. The other is that if you get out of good long term value investments as the market falls and do not get back in, you will miss out on long term profits as the market recovers!
Preparing Your Investments for the Storm in 2019
If you are a true long term value investor who looks only at the big picture, you may simply choose to ignore what you consider to be the static of a volatile and falling market in 2019. You will continue to use fundamental analysis in picking and tracking your investments. The only investments that you will sell will be those that do not promise profits over the long term and not necessarily those with weak prospects in the short term. Market jitters, interest rate concern, and the normal ebb and flow of markets are generally not a concern for a true long term investor. But, long term mega-trends are real and should be considered. This where the trade war is not just a short term issue. Rather it is a symptom of a global power struggle that will last a long, long time. To the extent that the USA and China, or the USA and Russia, can come to amicable terms, compete without working to wreck long term damage on the other, the current trade war and other such issues will be temporary. To the extent, that the major powers see this as an existential struggle for survival, it will redraw the economic, political, and military map of the world and that will not be good long term investing or prosperity.