Two Key Risks for 2019

Research on housing cycle peaks and trade impacts do not bode well for next year

In agreement with our recent 2019 forecast and deep-dive into the October correction (see Nearly Two-Thirds of the Entire U.S. Stock Market Just Went Through a Bear Market), the ever-objective, no-nonsense Urban Carmel at The Fat Pitch recently spoke with us on FS Insider about two key risks on his radar for next year.

Consider Urban Carmel on Housing Cycle Peak, Trade War Fallout

"There are two risks that we see coming up. The first is housing. Housing is a bit of a weak point in the economy right now. New home sales are something we track every month and they actually peaked November 2017 for this expansion and that is something that is becoming a bit of a worry because the latest data point we have from last month is that new home sales actually fell 13%. It's now starting to look like November 2017 may have been the high point for this cycle and that has tended to lead the economy by roughly two and half years."

Here’s a chart illustrating housing cycle peaks in relation to recessions:

housing cycle us recessions
Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results.

Urban continues:

“We're about 1 year into that decline in home sales and it's still early. This is the indicator that has the longest lead time with the economy but it is one domino that has fallen…so it is possible that we're starting to see the endgame in the expansion here.

If we start to see weakness show up in employment next year or if we start to see the yield curve move towards inversion, that would be a second or third domino flashing against the economy.”

The second greatest risk facing global markets in 2019 is the ongoing trade war between the U.S. and China, Urban said.

According to a recent study conducted by the St. Louis Federal Reserve Bank, “past tariff increases have been typically followed by large and persistent decreases in economic activity” when it comes to GDP per capita, investment, and wages.

Here’s what Urban had to say:

“There's this notion that the global economy is a zero sum game and that if the pie is 12 inches in diameter and if I have more of the pie to myself, then I eat more. That's not the case.

Basically, the history of trade in the world is that increasing global trade increases the size of the pie—it goes from 12 inches to 14 inches to 16 to 20 so when America and other trading partners have opened their borders and increased the amount of trade, the global economy has gotten bigger and that's been better for America as well as other countries.

What the Fed data is showing is that you're actually decreasing the size of the economy and this is bona fide, quantified threat to the expansion and probably the biggest factor that could potentially impact growth in 2019.”

Subscribers can access this full podcast with Urban Carmel covering the full macro-economic and technical outlook of the market by clicking here. For a free trial to our FS Insider podcast, click here. For more information about Financial Sense® Wealth Management and our current investment strategies, click here.

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