“There’s a lot of pressure on the market right now, most of it to the downside, that will carry forward into the new year,” said Lindsey Piegza, chief economist at Stifel Fixed Income.
Nobody can say for sure whether the stock market will sink further, and whether the broader economy will merely soften, as widely expected, or whether it will fall into a recession. But analysts see a greater risk of downturns than at any point in recent years.
The Federal Reserve is pushing forward with a campaign of interest-rate hikes that will slow economic growth. President Trump’s trade conflicts, particularly with China, are continuing and could escalate. The global economy is slowing. And the turmoil engulfing the White House appears to be intensifying.
“You have international chaos, seeming instability in the White House and a Fed that wants to raise rates, all of which is causing incredible turmoil in the markets,” Piegza said.
Trump was an unpredictable president from the start, and markets fell overnight after his election in November 2016. But they soon rebounded and climbed higher, a frequent talking point for the president.
Driving the gains were the facts that the U.S. and global economies were gaining momentum, interest rates were very low, and a platform of tax cuts and deregulation pursued by Republican-controlled government promised to boost profits even more.
But almost all of the favorable forces are now gone or diminished, and if the economy does hit a rough patch, it’s not clear whether the government can do much about it.
“We aren’t in a good spot, and there aren’t many cushions left if we fall further,” said Joseph LaVorgna, chief U.S. economist at Natixis. “The Fed can’t cut interest rates as much as it did in past slowdowns. We just passed a tax cut, so we aren’t going to do that again. And we won’t pass any new legislation in this political environment.”
One thing almost all agree on is that 2019 will not be the home run that 2018 was. Annual growth in 2018 is likely to hit 3 percent, the best in more than a decade. Meanwhile, inflation was restrained, wage growth picked up, and unemployment dipped to the lowest level in nearly 50 years.
“2018 was a strong year for the U.S. economy. There are no ifs, ands or buts about that,” said Roger Altman, founder of the investment banking firm Evercore and a former Treasury official in the Clinton administration. “2019 will be slower, but not recessionary.”
But in this context of slower growth, the disruptions from Washington might prove more significant. The markets are watching a partial government shutdown with no end in sight, the losses of key members of Trump’s team in public disputes over policy, a presidential threat to shut down the border with Mexico, incessant attacks on the Fed and a potential constitutional conflict as Washington prepares to digest the end of the special counsel investigation into possible ties between the Trump campaign and Russia.
“Financial markets have finally awoken to the fact that Donald Trump is U.S. president,” Nouriel Roubini, an economist widely credited with predicting the 2007 financial crisis, wrote this week. “Many trusted that, at the end of the day, the ‘adults in the room’ would restrain Trump . . . things changed radically in 2018.”
Trump himself has been on edge about the markets, as The Washington Post has previously reported, constantly checking where things stand as he worries that the stock decline will hurt his reelection chances in 2020. Before the sell-off, he frequently cited the strong markets as one of his most visible achievements.
The president has lashed out at Fed Chairman Jerome H. Powell, blaming him for killing the markets’ momentum by raising interest rates too quickly, which makes it more expensive for businesses and consumers to borrow money.
But in the past 10 days, Trump has done more than just complain about Powell; he’s had discussions about whether he could dismiss him. Speculation about a potential dismissal led Treasury Secretary Steven Mnuchin to issue a hasty statement in Trump’s name saying Powell’s job was safe.
Trump’s trade actions are also adding to the slowdown already underway overseas. This year he put hefty tariffs on 12 percent of all U.S. imports, which some economists say is the most protectionist trade policy the nation has had since the 1930s.
With its own economy slowing, China is no longer an economic engine driving the world economy, and growth in Europe and the rest of the globe have also slowed.
“The [Trump] administration has spent a lot of time hurting the business outlook, and now investors are trying to figure out just how badly,” said Doug Holtz-Eakin, president of the American Action Forum and an adviser to GOP presidential candidates.
Holtz-Eakin points to the trade fights and the president’s criticism of the Fed chairman as “self-inflicted wounds by Trump” that are contributing to investors’ alarm.
The White House is pushing back on that narrative, arguing that the underlying economy remains robust and that this is just a normal stock market correction.
“The bottom line is that the fundamentals are strong,” Kevin Hassett, chairman of Trump’s Council of Economic Advisers, said Thursday on the Fox Business Network. “There are a lot of reasons to be optimistic about the upside next year, too.”
Hassett, who said the president has been calling him to check in, added that the market “moves around for very, very strange reasons, day-to-day.”
Before stocks hit an all-time high in September, they had created enough wealth in the past decade to pay off the $21.9 trillion national debt.
Since then, the Standard & Poor’s 500-stock index has dropped 15 percent. Declines in stocks have slashed $4 trillion in wealth from shareholders and reduced the historic bull market’s gain to $15 trillion.
Those not paying attention to the market’s twists are soon likely to get a wake-up call. In the next few weeks, tens of millions of Americans will open their quarterly retirement statements and see decimated accounts.
“Individuals are scared to death. They are not cautious, they are scared to death,” said Jeffrey Saut, chief investment strategist at Raymond James.
Just over half — 52 percent — of Americans have at least some money invested in the stock market, according to the Fed’s comprehensive Survey of Consumer Finances.
Investors withdrew $36 billion from equity mutual funds and exchange-traded funds from October through mid-December, according to data from the Investment Company Institute, which represents mutual funds and ETFs. That is more than usual, but still a fraction of the $14 trillion in U.S. stock funds, according to the ICI.
“People will get their year-end statement showing a market down 20 percent from its peak and 10 or 12 percent for the year,” said Ivan Feinseth, chief investment officer of Tigress Financial Partners. “At the same time they are going to get their credit card bills for the holiday season. Imagine a double whammy.”
On Christmas Eve, the S&P 500 came within an inch of entering an official bear market, which is when there is a 20 percent decline from the recent peak.
A steep market decline doesn’t necessarily mean a recession is coming. Since 1929, there have been bear markets 20 times, according to data compiled by Charlie Bilello, head of research at Pension Partners. Eleven have been followed by a recession.
But deep and lasting market declines tend to make businesses and consumers afraid, and they pull back on spending, which is how the market can spill over into the economy and cause damage. There are early indications that is starting to happen: Consumers, who power the U.S. economy with their spending, are growing more uneasy about the future.
The Conference Board’s Consumer Confidence Index dropped in November and December. And retail investors are the most gloomy they have been about stocks in more than five years, according to the American Association of Individual Investors’ survey released before the holidays.
While consumer spending has been strong this holiday season, businesses are showing signs of paring back their spending as they see signs of duress. Nearly half of chief financial officers think the U.S. economy will be in a recession in a year, according to the Duke University/CFO Magazine Global Business Outlook survey.
Regardless of what happens in the markets or the overall economy, most financial advisers still argue that ordinary investors should not react emotionally to the political and market volatility. Instead, the conventional wisdom is to work with a financial adviser to set up a plan and stick with it, occasionally reassessing to make sure it still fits any individual investor’s goals.
“You should put blinders on and not pay attention to it,” said Saut, the chief strategist at Raymond James.