2019 Predictions

Most forecasters and analysts are usually pretty wrong trying to predict the outcome of the next year in financial markets: Cash (and near-cash equivalent assets, like money market funds or high interest accounts) was king in 2018. My 2018 predictions suggested that most asset classes would end the year lower as liquidity dried up on the back of interest rate increases and increased US government borrowing needs. Ray Dalio, a billionaire fund manager, Harvard educated and probably way smarter than I am, suggested (at about the same time) that anybody holding cash was going to "feel pretty stupid". But what do I know?

Most of these folks have an agenda and are out selling their agenda. I have an agenda too: trying to get the best possible risk-adjusted returns for our High Rock Private Clients, working hard to move them towards their long-term financial goals in a fiduciarily responsible manner at as low a cost as makes good sense. 

Which is why we have had an over-weight cash / underweight equities position in our global equity model for most of 2018. If you read Monday's blog or have had way too much idle time to follow this blog on a semi-regular basis, you will know that I believe that we are at the end of the economic expansion cycle and there may be more volatility to follow. What keeps me up at night is the possibility of a repeat of 2008 (see chart at the top), which if you recall saw the S&P 500 drop 53% from its 2007 highs to its 2009 lows. While I put a low probability on this happening again, I have learned in my 35 plus years of experience to never say "never". Did you see the "Miracle in Miami" last Sunday?

But more realistically, a drop to the "Bull-Trend" line of about 13% has a much greater probability of happening. The bulls will still be right if it holds that test (and there are no shortage of them talking up their positions in the media, even now). That would represent about a 22% correction from the highs, which the media would jump on to say that we were in a new "bear market", but we can ignore them.

We are itching to put our client's money back to work in the equity market, but my past experience has taught me (usually I am early to the party) that we can be a bit patient. I remember  2014  when it would have been much better to have waited until late 2015 / early 2016. Hindsight is 20/20, but, best we learn from our experiences not to make the same mistakes. I should have fought harder for my clients back then. I do now.

Will it happen in 2019? Possibly, but there are so many loose ends in the global economic, financial and political situation that it is really hard to see how it will all unfold. That is not so different from how things looked at this time last year, other than US tax reform, which everybody was so taken with. Now we will deal with the increased US deficit that this has left in its wake. Debt is still a real problem in the global economy and an economic slowdown, which we expect will happen (perhaps even a recession) because we are at or near that point in the investment cycle, could very easily exacerbate this. Higher interest rates from the US Federal reserve have been biting.

The good news is that once we get through the slowdown, or more likely during the worst of it, equity markets will bottom and there will be some excellent opportunities to take advantage of that we have not seen since late 2015 / early 2016 when risk was considerably lower and certainly much lower than it was in 2017 / 2018.

Wishing you all a very happy, healthy and prosperous new year!