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In Deep Dive #005, ISR's Correspondent Research Analyst Ross Mayfield, CFA, presents the 10 Things We're Watching in 2019.
1. US-China Trade War
Escalation of the trade war between the US and China may have been the defining market narrative of 2018. We are keenly interested in how the spat may evolve in 2019. Economic growth in the US has been resilient to date, but tariffs and tensions do seem to be having a negative marginal impact (e.g., stalled Cap Ex, input cost inflation, strained supply chains). Given the wide range of possible outcomes, unpredictable key figures, and significant long-term implications, we will be closely monitoring the trade war developments in 2019. The Hilliard Lyons View: We believe Trump will cut a deal in an attempt to pacify markets and boost his re-election chances. We do not expect a deal to substantively address long-term issues like intellectual property theft, but financial markets should embrace any clarity.
2. Federal Reserve Chair Jerome Powell
Fed Chair Powell got off to a relatively quiet start, overseeing three unanimous rate hikes through September amidst a rallying stock market. 2019, however, should be more interesting. The former businessman has found himself in President Trump’s crosshairs, as the Fed’s perceived hawkishness has clashed with the White House’s desire for lower rates. Further, in his final press conference of 2018, Powell spooked stocks with his comments, exacerbating the ongoing bear market and potentially damaging investor confidence. To that note, Powell has committed to a press conference following every meeting in 2019 in a nod to the market’s desire for transparency. Powell’s next 12 months are all but certain to be more exciting than the last. The Hilliard Lyons View: Powell will continue to emphasize an independent, data-driven approach for Fed decision-making. The increased visibility will test his ability to manage the Fed’s actions in the face of market & political scrutiny.
3. Corporate Debt Bonanza
Thanks to years of artificially low interest rates, corporate debt outstanding has rapidly increased over the last decade. In fact, total corporate debt has ballooned from $4.9 trillion in 2007 to over $9 trillion today. This can be seen in all corners of the fixed income universe, from record levels of covenant-light leveraged loan issuance to the dramatic rise in BBB-rated (almost junk) bonds. And as rates move up, servicing said debt will become more difficult for highly levered firms. While US consumer debt looks increasingly manageable, we will be closely watching the corporate debt build-up in 2019. The Hilliard Lyons View: Many believe the next US recession will be business-led, with ballooning corporate debt its harbinger. Any surprises to either the up- or down-side on this topic could be major catalysts for financial markets and overall US economic health.
4. European Central Bank Lifting Off of Zero
Though all eyes were on the Fed last year, perhaps the more interesting institution to watch in 2019 will be the European Central Bank. Despite the fragile economic and political situation in Europe, the ECB ended its quantitative easing program in December and is on target to raise rates this year for the first time since 2011. Further, the ECB will undergo a regime change as President Mario Draghi and his chief economist will leave office. New leadership will have a difficult balancing act – the Italy budget situation and stagnating growth may suggest looser policy, but the ECB has indicated it will tighten in response to what it sees as rising inflationary pressures. The Hilliard Lyons View: Futures markets predict one ECB rate hike in 2019, though we wouldn’t be shocked by none.
The United Kingdom is slated to exit the European Union on March 29. British Prime Minister Theresa May reached a Brexit deal with the EU late last year, but British lawmakers appear unlikely to approve it. May is seeking revisions to make the deal more palatable for the UK parliament, but this is difficult since all EU member states must agree to any changes. A second referendum could give UK citizens a chance to reverse the Brexit decision, but political support for this idea seems lacking. Academic consensus suggests a no-deal exit is the worst option from an economic standpoint, a scenario in which relations with the EU revert to World Trade Organization rules. The Hilliard Lyons View: No one outcome seems most likely at this moment. A hard Brexit (i.e., exiting the EU with no deal in place) is the tail risk scenario, and could rile global financial markets.
6. Debt Ceiling Showdown
In early March, the US debt ceiling will be reinstated after its 13-month suspension, allowing the Treasury to fully fund the government until some time in mid-summer. In the past, government shutdown threats have been used as negotiating leverage by the opposition party; in both 2011 and 2013, Republicans played hardball with President Obama to demand certain concessions. However, with a split Congress and heightened partisan tensions, it is hard to foresee an obvious deal being made. As the budget deficit skyrockets, this issue should dominate political and financial media during the summer months. The Hilliard Lyons View: We expect another government shutdown in lieu of a substantive bipartisan deal.
From Oct. 3 through year-end, oil suffered a dramatic ~40% price decline. In many ways, the price of oil is a barometer for the global economy; a crash in oil generally results from oversupply, dwindling demand, or both. Much like 2014-15, financial markets seemed to take the dip as a sign of slowing global demand, specifically in China, and stocks tumbled in the ensuing months. Most interestingly, the price dropped an additional ~15% following OPEC’s announced production cuts in December. As the US continues to gain global market share of oil production, it is possible that OPEC will exert less influence on prices. The ramifications of US energy independence will be widely felt both economically and politically. The Hilliard Lyons View: Oil moderates as the market digests OPEC, US, and Canadian policy moves; China demand could bump up somewhat thanks to an injection of fiscal stimulus. We will be watching crude in 2019 to gauge the health of the global economy and to monitor the rapidly evolving energy landscape.
8. 100-Strong Freshman Class in the House of Representatives
63 new Democrats and 37 new Republicans will be installed into the US House of Representatives this month. It is the second largest freshman class of the last 50 years (surpassed only by the ’93 class elected during mid-terms of Clinton’s first term). The group not only swings control of the House to the Democrats, but also adds a splash of idealism and an air of activism. Individual Reps typically do not wield much power, though we believe this group, in aggregate, could be disruptive (or transformative). The Hilliard Lyons View: With Republicans still in control of the White House and Senate, the class is unlikely to make a major impact on legislation this Congress. That said, we do believe they enhance the likelihood of an impeachment attempt, and they could be agitators in debt ceiling/budget debates scheduled for 2019.
9. Italy’s Populist Moment
When Italy’s populist-led government gained power in June, they inherited a shaky economy and the Eurozone’s second highest debt-to-GDP ratio. However, the new leadership initially proposed increasing deficit spending in order to stimulate the economy and fulfill campaign promises (e.g., basic income). Eurozone partners wanted Italy to significantly reduce their debt load and rejected their proposed 2019 budget, though a compromise was reached in December. The standoff fueled populist, anti-euro sentiment, and threatens to further erode relations with the EU at a critical juncture. The Hilliard Lyons View: The December budget approval is a positive step for EU-Italy relations, though in lieu of unexpectedly strong economic growth, we expect tensions to persist.
10. Lyft & Uber IPOs
Both ride-hailing behemoths have indicated they will go public in 2019. The firms are two of the largest private companies in Silicon Valley, with a combined value of ~$100B. Success of their IPOs would be an interesting commentary on the overall mood in equity markets. In general, IPO activity this market cycle has been subdued and tech leadership has faded toward the end of the year in favor of more defensive names. The Hilliard Lyons View: We expect financial market conditions to allow both Lyft and Uber to go public in 2019, though tempered market reactions could indicate a risk-off appetite on Wall Street.
Investment Strategy & Research Department
- Mark Nickel, SVP, Chief Investment Officer | 502-588-1227 – firstname.lastname@example.org
- David Burks, SVP, Equity Income Analyst | 502-588-8648 – email@example.com
- Ross Mayfield, CFA, Correspondent Analyst | 502-585-8994 – firstname.lastname@example.org
- Spencer E Joyce, VP, CFA, Markets Analyst | 502-588-8402 – email@example.com
- Susan Koch, EdD, Communications Strategist | 502-588-1744 – firstname.lastname@example.org
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