Looking Ahead for 2019

January 11, 2019

Looking Ahead:

What’s the Market Got Planned for 2019?

With 2019 right around the corner, one of the topics you’ll start seeing all over the financial blogosphere is predictions about the market’s future patterns. The current mood most seem to be in is that 2019 will have us in a gradual downturn. In other words, while you won’t see an overnight crash or anything cataclysmic, you’ll likely get to the end of 2019 and notice that over time your accounts did take somewhat of a hit.

Yield Curve

One phrase you might be seeing thrown around as the reason for this economic slowdown is something called the Yield Curve. In layman’s terms, the Yield Curve is a graph that measures the risk of the bond market. Typically, it’s the 2 year and 10 year rate that get the most attention, as right now we’re seeing an inversion between 1-5 years. You can actually go and see what the national Yield Curve is every day: if you like numbers, it might be your kind of thing as the government doesn’t make the Yield Curve easy to understand for the average person.

What’s the Yield Curve got to do with you? At first glance, you might think not a lot—but the Yield Curve helps to determine future interest rates and predict overall economic activity. When all is well in Yield Curve land, you’ll see that long-term bonds are paying out more compared to short-term ones. Right now, we’re in what’s known as the Inverted Yield Curve. Another way to think of it is a long-lasting “Opposite Day” for bonds, as short-term bonds start paying out at a higher rate compared to long-term. Many are worried that if this continues to play out in the coming year we may be in for another recession, as the last 7 Inverted Yield Curves occurred right before a recession hit.

Inflation and Volatility

If you get stuck reading doom-and-gloom articles online, it’s hard to pinpoint what you really need to worry about for the coming year. The good news? Instead of trying to juggle a million different financial points in your head when trying to plan for a potential recession, we can narrow it down to two core ideas for the time being:

  • Market volatility is likely not the biggest worry retirees face; the true thing to be on the lookout for is inflation. This is the subtle demon that can erode the value of your nest egg over many years, especially if you keep your money in low-yielding deposit accounts. Stocks have an excellent record of outpacing inflation over the decades. In contrast, savers clinging to ultraconservative tools are highly exposed to inflationary goblins.
  • Volatility is also not your worse enemy—sometimes it can even be your ally! It’s easy to forget that market volatility is a normal part of the cycle and that, over the years, the appreciation potential of stocks has greatly overshadowed the losses. It’s also easy to forget that volatility can be a benefit, such as for investors who utilize dollar-cost average and rebalance their holdings. Hardly anyone has all their money in the stock market, so periods of softness provide an opportunity to buy shares more cheaply.

What can you do?

Anyone who has been in the market for a while can tell you there are highs and lows, as that’s the nature of the beast. The important thing to remember is to not let yourself be bogged down by grim forecasts. Make sure you’re meeting with your advisor to keep your plan as up-to-date as possible and realize that bad years are guaranteed to happen, just as good years are guaranteed to follow. If you’re unsure if your plan is ready to handle whatever 2019 might throw it’s way, feel free to give us a call for a free consultation and review of your current financial plan.