With stock markets fading over the last quarter of 2018, investors are understandably nervous about the performance of the economy in 2019. Markets haven’t gotten off to a great start this year, and with high-flying Apple showing signs of weakness, most analysts are expecting economic growth to slow this year as the effects of the trade war with China really begin to bite. Coupled with higher interest rates and we could see a perfect storm of factors coming together to send the global economy into recession.
Trade War
The likelihood of an all-out trade war remains high. No real progress has been made on coming to an agreement with China, and with the prospect of a Democratic House frustrating President Trump’s domestic agenda he may look to international affairs to take focus off his inability to get the Democrats to accept any of his domestic proposals.
That could further exacerbate the deterioration of international trade, boost tariffs, and result in further costs to both consumers and businesses. That’s why markets continue to worry about every indicator that companies are starting to feel the effect of the conflict with China.
Rising Interest Rates
Interest rates right now are all over the place. While the federal funds rate continues to rise, rates on 2-year, 3-year, and 5-year Treasury bonds have dropped to the same level as the federal funds rate, or to just about the same level as 4-week Treasury bills. That’s an indicator that markets expect (or hope) that the Fed and other central banks will cut rates at some point in the next few years. But that may be wishful thinking.
Central banks are notoriously bad at diagnosing bubbles in the economy and at taking measures to combat them. The only weapon in their arsenal is to cut rates and purchase bonds and other assets, which just sows the seeds for the next bubble and the next crisis. That’s what we’re seeing right now, as the bubble blown by quantitative easing is finally about to burst.
2019 looks like it will be a very difficult year for investors and businesses. Aside from gold, which appreciates whenever stock markets decline, there don’t look to be too many good investment options. Let’s just hope that enough people are cognizant of the danger that they can protect themselves and their investments without suffering too many losses.