Quarterly Market Outlook: Stay Prepared

by Team of Charles Schwab, 3/21/19

Key Points

  • The U.S. economy remains generally solid, but the effects of tax cuts are fading and corporate earnings growth is expected to slow in 2019.
  • Although a U.S. or global recession doesn’t appear to be imminent, it’s a possibility.
  • The Federal Reserve appears to have put rate hikes on hold for now. This should keep 10-year Treasury bond yields in a range of 2.25% to 2.75% until we see signs of inflation picking up, or concerns about global growth subside.

In the three months since we published our 2019 Schwab Market Outlook, global growth has slowed and the Federal Reserve has suggested that short-term U.S. interest rates aren’t likely to rise anytime soon. Our theme for the year was “be prepared,” and that still holds true. With the first quarter behind us, here’s what we expect to see for the remainder of the year:

U.S. and global recession risks will remain elevated. U.S. stock markets have bounced back from the sharp losses seen at the end of 2018. However, as we noted in our 2019 global stocks and economy outlook, the risk of a U.S. and/or global recession remains relatively high. This doesn’t necessarily mean a recession will occur in 2019, but it’s a possibility within in the next six to 18 months. The outcome of ongoing global trade talks may hold a key to the length of time before the next recession.

The U.S. economy remains generally solid, but the effects of tax cuts are fading, and earnings growth is expected to slow. The 2017 tax cuts boosted corporate earnings, but they’ve also increased federal debt levels. Investor sentiment is likely to swing in a wide range in 2019, as we predicted in our U.S. stocks and economy outlook, but animal spirits have been dented and bouts of exuberance are far less likely this year. Meanwhile, strong 2018 earnings growth won’t be repeated in 2019, partly because last year’s earnings set such a high bar: After rising more than 20% in 2018, year-over-year S&P 500® index earnings growth is expected to be negative in the first quarter, and to grow by single digits in the remaining quarters of 2019.1

Interest rate concerns have eased. The Federal Reserve has raised short-term interest rates nine times since 2015, but Fed officials recently have suggested they don’t plan to raise rates again anytime soon. In our 2019 fixed income market outlook, we said that 10-year Treasury bond yields probably had peaked for this tightening cycle at 3.25%. We now expect 10-year Treasury yields to trade in a range of 2.25% to 2.75 until we see signs of inflation picking up, or concerns about global growth subside.

Around the world, policymakers are exploring ways to increase economic growth in their countries, including tax cuts. If successful, these measures could keep economic growth moving higher for a while longer. However, much depends on the outcome of trade talks, including the U.S.-China talks and a looming trade dispute over U.S. auto imports from Europe and Japan.