In the U.S. economy, we start 2019 in our 10th year of the current economic expansion, 10 years away from the bear market of the Great Recession, and over a year into a landscape-altering tax bill favoring American businesses. Our thoughts for the American economy and investors now turn to longevity, volatility and rationality.
We believe we can keep this economic expansion going, but not without overcoming challenges, and likely at a slower pace than seen in 2018.
The Federal Government has cleared a path for more business investment and cash flows brought back to America, but now finds itself almost unable to agree on financing itself or projects for the good of the country. U.S. government spending projected for fiscal 2019 is $4.4 trillion, which is over 20 percent of our economy. In addition, trade is also in flux, and many of those exporters reside in the Great Lakes region.
With potentially 30 percent of GDP in play this year between the federal government and trade, there will be even more focus on consumer spending and business investment to keep this economic expansion going.
We had significant volatility twice in the stock market last year, in the first and fourth quarters. When the Dow Jones Industrial Average moves more than +/-400 points from the open, we take notice. There were 31 of those days in 2018, which is relatively high going back to the Great Recession.
With economic growth and corporate earnings growth both likely easing from their 2018 pace and with the Fed and trade still in the headlines, we suspect stock, commodity and bond markets to remain volatile from day to day and headline to headline.
When volatility strikes markets, it is important that long-term investors remain focused on their outcome objectives, dynamic in conduct and patient. While we cannot escape heightened investment volatility, we can dynamically manage investment portfolios through the ups and downs to the betterment of their stated investment objectives.
The U.S. is a $20 trillion economy, with businesses that produce $2.2 trillion of pre-tax profits (see chart). We are, by far, the largest economy in the world, with the deepest and most liquid stock and bond markets.
What played out in 2018 is that the American economy and stock market do not always move the same direction. 2018 was a very good year for American business, but not so much for American investors.
Our view early in the year is that the U.S. economy will continue its economic expansion, and patient investors will see a more constructive market environment in 2019. We have always subscribed to the belief to never underestimate the resiliency of the U.S. economy.
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