Blog - Louis Scatigna, Author of The Financial Physician

2019 Economic and Financial Market Forecast Lou Scatigna, CFP

It’s that time of year again, as we enter the New Year it’s a great time to review the past year and make some economic forecasts. 2019 is the first year since 2013 that I am putting out a comprehensive forecast. During the past eight years the markets have not been real. The Fed’s zero interest rate policy (ZIRP) goosed markets to heights that were not justified based on fundamental and technical analysis. Now with The Federal Reserve hiking rates (and taking the market cocaine away), financial market action should be more reality based and reflect the strength of the economy (or lack thereof) as well as historic market valuations not based and corporate earnings. With this in mind, I am more comfortable with my ability to forecast the economy and financial markets.

My goal in bringing you this information is to help prepare you for what might happen. Forecasting the markets in the coming year is challenging because there are so many variables that can influence the outcome. There are many political and geopolitical events that can greatly dictate the direction of financial markets in 2019. The 2016 Presidential election was as divisive and nasty as any I can remember. Our government is broken and as partisan as it has ever been. Markets do not like impotent leadership and politics are going to play a big role in U.S. financial markets in 2019. The Congress is now divided with the Democrats taking over the House next week. We can look forward to two years of endless investigations, subpoenas and possible the Impeachment of President Trump. This uncertainty is dangerous to financial markets. While The Fed recently stated they intend to raise rates at least two times in 2019, I am not sure they will be able to do so as the economy and stock markets crater. The Fed’s interest rate policy will greatly affect both the economy and financial markets greatly in 2019.

In this report I may forecast two possible outcomes based on certain events taking place.

The problem with forecasting financial markets in 2019 is that markets will be hostage to news which can sway them up or down. Unless one is psychic and able to see events in the future, predicting the performance of any financial market with confidence is impossible but I will try my best.

Please don’t take this as investment advice, talk to your own financial advisor before making any moves in your investment portfolio. Use this forecast as one of many out there and come to your own conclusions on what you should do.

As always when I make a dire forecast I hope and pray that I am wrong, I get no pleasure in being correct as the country suffers. I found myself getting depressed as I researched, and came to my conclusions and wrote this report. I really fear for the future of our once great country. 2019 marks 36 years that I have been in the financial services industry and I have never been so concerned about the economy and financial markets as I am today.-Lou

Economy:

The U.S. economy hummed along in 2018 aided by the Trump tax cut law that went into effect in early 2018. GDP growth surpassed 3% for the first time in 10 years. Housing prices finally began to decline in most markets as rising mortgage rates took a toll. Real Estate agents are seeing a plunge in buyer activity as many homes are unaffordable. Unemployment fell to historic lows as 200K plus jobs were created during an average month during 2018.

The U.S. (and therefore the world) will be facing significant headwinds in 2019. As I write the Federal Government is closed down due to a dispute between Senate Democrats and President Trump over $5 billion in border wall funding. If the government remains shut down longer than two weeks into January the markets will relate quite negatively. A combination of rising interest rates and a 20% stock market crash (wealth effect) the last 3 months of 2018 will result in the economy declining significantly in the first and second quarters of 2019. Some economists are stating that we may already be entering a recession. I forecast GDP growth of only 1% the first half of 2019 and GDP contraction of 0.5-1% during the second half of the year. 2019 will be a dismal year for the world economy. Again, there are some many variables that can affect the economy and most of them are turning negative. I expect that the economy will be entering a strong recession by the end of the first half of 2019.

Another headwind for the economy and financial markets is trade tension between the U.S. and a number countries, especially China. A protracted trade war will have a negative effect on the world economy and financial markets.

It s no secret that President Trump is not happy with The Federal Reserve raising interest rates and killing the economy and stock markets. Trump has touted that his policies are responsible for 2018 record stock market and unemployment rate. He is especially scornful of Fed Chairman Jerome Powell (who Trump nominated to Fed Chair on the advice of Treasury Secretary Steve Mnuchin). It will be difficult for Trump to be reelected in 2020 if the economy is in recession and the stock market is in a brutal bear market. Some conspiracy theorist (myself included) believe The Fed is deliberately trying to take a two by four to the knees of the economy. You can’t get more “Deep State” than Central Bankers.

Rumors abound in Washington that Trump is considering firing Jerome Powell. That would be a big mistake on his part. No former Fed Chair has been fired by the President. A Powell firing by Trump would cause financial markets to crash as the independence of The Fed would then be questioned.

Another negative for the US economy is rising healthcare costs. Since Obamacare was shoved down our throats health insurance premiums have skyrocketed (as I predicted when it was implemented). With premiums equaling or exceeding mortgage payments, families have been struggling to get by. The consumer will have no choice but to cut back on spending which will be a drag on retail sales.

Higher interest rates have hurt both the housing and auto industries hard. New and existing home sales have fallen dramatically in the last half of 2018 and I see that continuing throughout 2019, especially if The Fed continues to raise rates. Auto sales have also declined as both car loan rates and car prices have gone up. Autos and homes are big drivers of the economy. As both continue to decline it will have a negative effect on GDP.

The U.S. economy has not experienced a recession in 10 years and is way overdue.

Bottom Line: The U.S. economy will enter a recession in 2019 and it will be painful given the record level of debt most families are carrying. Home foreclosures and auto reposessions will be a big story again in 2019.

Unemployment:

Unemployment as measured by the Bureau of Labor Statistics remained below 4% for much of 2018. Ironically, the decline was due to the fact that millions of people “left the work force”. The so called “participation rate” fell dramatically in 2018 as the government decided that the long-term unemployed really were not unemployed but “discouraged” and not looking for work and thus need not be counted for the official UE rate. Are these people not still unemployed? Of course they are, but the government will not count them in the figures. John Williams excellent website Shadowstats.com calculates key statistics the way they were calculated in the 1980s and 1990s before official fudging started to skew the numbers (positively, of course). According to Shadowstats the real unemployment rate is about 18%,

Regardless of the bogus government numbers, unemployment in the U.S. will continue to remain low during the first half of 2019 and then soar.

Bottom line: The official unemployment rate in 2019 should range between 3.6% and 5.3% with the highest unemployment rate in 4th quarter 2018. Shadowstats unemployment rate should range between 18 and 22%.

Housing:

If only that housing bubble did not happen……again.

During 2018 what was once a robust housing market (due to record low mortgage rates) turned down as the Fed raised interest rates and home buyers saw mortgage rates rise from 3.5% to 5.0%. While 5% mortgage rates are historically still low, elevated home prices coupled with higher rates have made home affordability difficult for many families. Rents will continue to rise as more families opt to rent rather than buy a home.

Bottom line: Home prices will continue to fall in 2019. If the Fed continues to raise rates the decline will be more severe.

Inflation:

The big question facing investors in 2019 is “Are we going to finally experience inflation as a result of the Fed’s massive money creation over the last decade?. The massive QE money printing by both the Fed and ECB will result in rising prices especially for food, energy and precious metals. The number one question I am hearing from clients and radio listeners is “How can I protect myself from inflation?” The answer is quite simple, own things, not paper. If it is real and you can put your hands on it then it is an inflation hedge. Real Estate, gold, silver, food, oil, natural resource stocks are all ways to protect yourself from the coming inflation nightmare.

Inflation as measured by the Consumer Price Index is another fat lie served up by our government. You see, changes in the CPI affect the inflation adjustments to a whole bunch of government programs from federal government pensions to the biggy, Social Security. Grandma’s cost of living is rising but due to a very low CPI she get’s a small increase in her SS check, very nice. Thankfully, Social Security will see a 2.8% CLA in 2019, the largest increase in many years. Now the government is considering calculating the Social Security COLA using the “chained” CPI which will allow the government to use a lower measure of inflation than the regular CPI.

Central Banks have no real option to keep the system alive except to print money and prop up banks that are drowning in bad debt issued by bankrupt governments. The world has never seen debt levels that we have today. Historically, when debt becomes too high for a country it is inflated away by massive monetary expansion and this time will not be the exception. The Federal Reserve has stated they will be raising rates in 2019. If the economy continues to tank and the stock market continues to collapse, The Fed will have no choice but to lower rates again. The risk of hyper-inflation is real and must not be overlooked. The question is not really are we going to have massive inflation, the question is when. I have no doubt that it is coming (there is no way to really avoid it) I’m just not sure when. Agricultural commodities and ETFs that track them along with precious metals is the best way to protect yourself against this inevitability. 2019 may be the year that the Great Inflation begins. It will be something to behold. If Fed continues to raise rates in 2019 we will most likely experience deflation for a period follwed by inflation thereafter. My guess is that The Fed will NOT raise rates in 2019, resulting in moderate inflation in 2019 followed by major inflation in 2020.

Bottom Line: Although it is an understated government number, the CPI will rise by 3.5-5.0% in 2019. The real inflation rate will be closer t0 10-12%.

U.S. Dollar:

The U.S. Dollar rose against other major currencies in 2018. The dollar index started the year at 92 and ended the year at 96. The U.S. was still considered to be the safest bet as Europe continued to deal with BREXIT and the struggling economies in Spain, Italy and Portugal.. I look for the U.S. Dollar begin it’s historic collapse in 2019. The massive money creation by the Fed this past decade will be the dollar’s death knell and it will start to happen by late 2019.

Rising interest rates in the US lent support to the US Dollar. A weaken economy and stock market will most likely result in The Fed curtailing their rising interest rate policy and will be forced to lower rates instead in an effort to rescue the economy and crashing financial markets. The Reserve Currency status of the Dollar is being chipped away every day as other countries begin to trade oil and other goods using currency other than the dollar.

The national debt has doubled to $22 trillion in just 10 years. The US is expected to have to borrow $1.5 trillion in fiscal 2019. Trillion plus deficits will be experienced for years to come. This money will be printed and will dilute the dollar’s value.

Every 1% increase in interest rates will cost the government in $220 billion in additional interest costs. How will we pay it? Print more money and borrow it.

Bottom line: The dollar is toast and the dollar index will drop from 96 down to 82 or worse in 2019.

Gold and Silver:

The gold and silver market is like no other market in the world. No other market trades like precious metals. Gold and Silver are paper currency alternatives and as such are heavily manipulated by Central Banks, The Exchange Stabilization Fund and Bullion Banks.

Gold was down about 6% in 2018 and silver was down about 12%.

I expect 2019 to be the year when gold and silver soar to amazing heights as the wheels come of the dollar and inflation begins to rear it’s ugly head. Gold closes 2018 at around $1,275/ounce while silver ends 2018 at $15.30/ounce. With all the financial craziness I expect in 2019 gold and silver will be seen as a safe haven. Couple that with The Fed potentially having to lower rates in the face of financial crisis, we should see precious metals have a nice upside run. 2019 will be known as the year that precious metals outperformed every asset class.

I expect gold to rise to at least $1,750 (+ 37%) in 2019 and silver will go up even more on a percentage basis to at least $30/ounce (+50%). I fear that my forecast may be too low for gold and silver.

Bottom line; You must have some gold and silver in your life, it is financial life insurance.

Oil:

This is a tough market to call to make since so many variables that can push oil much higher or lower. The number one variable is geopolitical risk in the Mid East. Oil has experienced the worst bear market than any other asset the last 3 months of 2018. After hitting a high of $79.22 in early October, Oil has dropped an astounding 43% to $46/bbl. The dramatic decline in oil prices suggest that the world economy is slowing. Events in the Middle East will always have an effect on oil. OPEC is still a functioning Cartel and has power to manipulate oil prices.

Oil will experience great volatility, ranging from $85 on the upside and $30 on the downside. Again, anything is possible with oil prices in 2019.

Bottom line: It depends on events in The Middle East and the World Economy

Stock Market:

The last 9 years was one of the greatest bull markets in history. After the financial crisis of 2008, The Fed embarked on a very stimulative monetary policy. Never before had the country experienced virtually zero interest rate. Some countries (Germany and Japan) actually had negative interest rates, meaning you would pay the country to have the pleasure of loaning them money! This easy money policy resulted in the greatest stock market bubble the world had ever seen. Shortly after Donald Trump was elected President The Fed began to raise interest rates. The market continued to go up even as the Fed was raising rates until the last quarter of 2018. The stock market peaked at record highs in early October. Then the market went into a volatile slow motion crash. The Dow declined from an Early October record of 26,951 to a low in later December of 21,712.53, an astonishing 5,239 point decline or 20%. Intraday volatility was unlike anything I have witnessed in my 36 years on Wall Street career. Christmas week is usually quiet and benign in the markets, not this year, stocks experienced the worst Christmas Eve in history (-650) while the day after Christmas saw the best point gain ever (+1,086). The stock market will continue to be very volatile in 2019. The driving force behind the market’s performance will be two things:

Donald Trump and The Federal Reserve

If the Fed follows through and continues to raise interest rates the market will continue it’s crash. If The Fed does not raise rates or lowers them in a crash or recession, the market will still go down. Some have suggested that The Fed (as Deep State as you can get) is purposely trying to crash the economy and stock market leading into the 2020 Presidential Election. I don’t recall a time when The Fed raised rates when markets were crashing and housing and auto sales were plunging.

The only way The Fed will not raise rates is because the economy and stock markets are crashing. What happened in the last three months of 2018 can not be discounted. The great bull market falling The Great Recession is over. What follows is either a grinding, multi-year bear market, or worse. a historic crash.

The Democrat led House of Representatives will be doing everything they can to remove President Trump from office. Either through impeachment (Won’t happen since they would need 66% of Republican majority Senate or death by a thousand cuts so he can’t win reelection in 2020. The Special Council’s findings when released could rock financial markets as well. Endless investigations into Trump and his family will weigh on financial markets and confidence in The US Government.

Political and geopolitical events are going to have a major influence on stock prices in 2019. What happens in the banking system will also drive events. The worlds banks hold over a $quadrillion ($1,000,000,000,000,000) in derivative bets. All it takes is large moves in markets (interest rates, stocks, oil) to cause huge losses to the banks. I believe it has happen already and we just have not heard about it yet. The bank stocks are down as much as 30% just since October indicating that something is not right with big banks. I would not keep my life savings in any large bank. Use Community Banks, Credit Unions or, better yet, US Treasury Money Market Mutual Funds.

I expect the first half of the year to be a scary time for stock market investors. The potential for war in the Middle East is another huge variable that could implode world stock markets. Political wrangling over the budget, entitlements, illegal immigration and the debt ceiling are other negative factors that could result in a stock market panic. The country is hopelessly divided on what to do with taxes and entitlement spending meaning nothing will be dealt with and our debt will grow.

I expect stocks to plunge during the first half of 2019 with the Dow trading down to 16,000 (or worse) and the SP 500 down to 1,600 (down 35%). If and when that happens we will see a generational buying opportunity in stocks.

The stock market has been a huge casino that is as risky now as it has ever been. Be very careful.

Bottom line; After a scary panic during the first half of 2019 stocks will rebound but still may close 10-20% lower for the year. Lower your risk NOW.

U.S. Treasuries:

U.S. Treasury bonds (especially long maturities) are in the mother of all bubbles that will eventually crash and burn. In 2018 we saw the yield curve being to invert, meaning short term bonds yielded more than long term ones. Every recession was preceded by this event.l Foreign investors become skittish of the U.S. budget deficit, rising debt and the severe political divide in Washington. When the yield breaks 3.25% on the ten year the game is over and a brutal multi-year decline in bond prices will begin.

While I believe gold and silver will be the best asset class in 2019, U.S. Treasury bonds may be the worst. As Treasuries sell off so too will the U.S. dollar.Or the fall in the US dollar will trigger the Treasury bond selloff.

I would only own Treasuries with a maturity of 3 years or less, longer maturities carry an amazing amount of risk.

Bottom Line:

US Treasuries have become much more risky as The Fed continues to raise interest rates. The US debt has hit $22 trillion and is growing rapidly. Foreign governments are not only not buying US debt, they are in fact selling the debt they hold. This will result with the buyer of last resort, The Fed, monetizing the US debt and deficit. This is a negative for both the dollar and US Treasury Bonds.

Summary:

2019 promises to be another roller coaster year with all financial markets experiencing unusual volatility. The big story will be war in The Federal Reserve, Donald Trump’s Presidency and The Middle East, and all financial markets are going to be violently volatile.

Although this report covers the state of financial markets, I want to also comment on the state of American culture.

Although it has been happening for a long time, recently we have seen country rapidly fall both morally and ethically. We have eliminated all reference to God in public life and with that the moral and ethical values of our country’s Judeo-Christian heritage. The sanctity of life has been diluted as we kill 8,000 unborn babies every day. Young men today have had their minds warped by violent movies and video games. All the recent mass shootings have been by young men 20-24 years of age. The Opioid epidemic continues to claim the lives of too many Americans. This generation is the product of our country’s decade long moral decline. Explicit music and movies celebrate killing and encourage violent behavior.

We are close to the end of the lifecycle of The United States of America. We have corrupted the political, financial and moral fabric of our nation.

It pains me to say that our future is not bright.