The U.S. economy accelerated in 2018, helped by the tax cuts. Company earnings rose more than 25% in the first half of the year. Although the pace of growth is likely to slow down in the second half of 2018 and into 2019, we expect above-average economic and earnings growth to continue, supporting rising stock prices over time.
The global economy is growing modestly despite ongoing concerns about higher tariffs and trade disruptions. The proposed trade agreement with Canada and Mexico is positive, but more tariffs have been implemented on trade with China than we expected, and negotiations seem difficult and lengthy. We don’t believe an all-out trade war will ensue, but risks remain. So far, tariffs have raised some prices but taken only a modest toll on global trade and growth.
Consumer prices are rising slightly faster than 2% per year, and inflation is likely to continue near that rate. As above-average economic growth continues, shortages in various industries are likely to spread, leading to rising wages and costs, and higher tariffs are also increasing prices. In addition, supply disruptions from sanctions on Iran and turmoil in Venezuela could push oil prices higher. But we think fierce competition and cost-cutting are likely to keep inflation from increasing beyond the Federal Reserve’s comfort zone around 2%. Make sure you’re prepared for prices to keep rising at about the same moderate pace – not a lot faster or slower.
Edward Jones continues to expect slowly rising interest rates over time, lowering bond returns. We believe the Fed will continue to raise rates at a gradual pace as long as the rate of economic growth doesn’t slow sharply or inflation doesn’t rise meaningfully, which is our outlook. But the Fed has signaled it intends to pause sometime in 2019, since monetary policy usually affects the economy with a lag. Global monetary policy in 2019 is likely to continue to be supportive, as we expect foreign central banks will still provide stimulus, helping extend the market and economic cycles.
Rising U.S. interest rates, coupled with slower economic growth in the rest of the world, have strengthened the dollar compared to many foreign currencies. The strong dollar has contributed to the underperformance of all the international asset classes as well as the sharp drop in emerging-market stocks. A rising dollar also makes international investments more attractively priced, and historically, performance of international and U.S. equities has rotated. That’s one reason we think it’s important to continue to own an appropriate amount in international equity investments.
Most investors own portfolios that include bonds as well as stocks because they aren’t comfortable taking as much risk as the stock market. But when stocks rise and bonds decline, portfolios that include both stocks and bonds don’t rise as much as the stock market – that’s what happened in the first three quarters of 2018. Rising interest rates have reduced bond values. In addition, international investments lagged, so better-diversified portfolios with a wide variety of asset classes didn’t perform as well as U.S. large-cap stocks represented by the S&P 500. Looking over time, however, a portfolio with a combination of stocks and bonds has been less volatile than stocks alone, making it a better choice for many investors.*
*Source: Morningstar Direct, based on the S&P 500 Total Return Index and the Barclays U.S. Aggregate Bond Index. Results may vary for an individual portfolio with similar holdings. Past performance of the markets is not a guarantee of how they will perform in the future.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.