2019 FORCAST

     2019 will be a difficult year for investors. The huge tax cuts which propelled earnings for 2018 are wearing off. Corporations will still enjoy the lower tax rates, but earnings comparisons with previous periods will be muted. Higher interest rates combined with higher levels of debt will further crimp earnings. Trade tensions with China will continue to be a drag on market sentiment and cause preemptive price increases to consumers. Turmoil in the White House from the Mueller investigation is another worry for U.S. markets. The impeachment or resignation of Trump could trigger a massive sell-off. Wage growth should continue at a modest pace but unemployment will creep up as economic growth slows. The Federal Reserve is expected to increase rates 2x in 2019 but I believe the 25bp raise in Dec is the last for the immediate future. The Fed can further slow the economy with its quantitative tightening without interest rate increases. The price of crude oil has been very weak at the end of 2018 due to a glut of supply. This could slow exploration of shale oil in the U.S. The resulting decline in profits and employment will be an additional drag on our economy. One reliable indicator of a coming recession is an inverted yield curve. This is when short term treasuries yield more than long dated treasuries. Recently, the difference between the 10 year treasury and the 2 year treasury was only 14 basis points, which is close to inverting. The 5 year vrs the 2 year treasuries have already inverted. I am inclined to take a defensive stand considering all the possible negative events that could occur in 2019. Over the past 12 months, I have been increasing my purchases of laddered CD's to provide income and the safety of deposit insurance. I have also maintained substantial cash balances in money market funds. Due to the Fed rate increases over the past several years, money markets are offering rates in the 2.37% range. Having liquid assets also allows you to pick-up bargains in stocks as the market declines. During difficult times, I like defensive stocks-those that hold up in down markets. Examples of defensive issues include: consumer discressionary companies like Procter and Gamble (PG), drug companies like Pfizer (PFE) and utilities like Next Era Energy (NEE). Diversification can be achieved by buying ETF's in these sectors. Finally, there is one sector picking-up steam and could be recession-proof: the cannabis trade. The excitement around legalization for recreational use and the known benefits of medical use could propel the Canadian stocks like Canopy Growth (CGS) and Cronos (CRON). An added benefit of these two is the large stakes taken by deep pocketed companies wanting a piece of the action. Their capital may be necessary for the rapid growth expected in the future.