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Note: Unless otherwise specified, currency amounts described in this article are in U.S. dollars, and government references are to the U.S. government.

Quarterly Market Outlook: Stay Prepared

Key Points

  • The U.S. economy remains generally solid, but the effects of tax cuts are fading and corporate earnings growth is expected to slow in 2019.

  • Although a U.S. or global recession doesn’t appear to be imminent, it’s a possibility.

  • The Federal Reserve appears to have put rate hikes on hold for now. This should keep 10-year Treasury bond yields in a range of 2.25% to 2.75% until we see signs of inflation picking up, or concerns about global growth subside.

In the three months since we published our 2019 Schwab Market Outlook, global growth has slowed and the Federal Reserve has suggested that short-term U.S. interest rates aren’t likely to rise anytime soon. Our theme for the year was “be prepared,” and that still holds true. With the first quarter behind us, here’s what we expect to see for the remainder of the year:

U.S. and global recession risks will remain elevated. U.S. stock markets have bounced back from the sharp losses seen at the end of 2018. However, as we noted in our 2019 global stocks and economy outlook, the risk of a U.S. and/or global recession remains relatively high. This doesn’t necessarily mean a recession will occur in 2019, but it’s a possibility within in the next six to 18 months. The outcome of ongoing global trade talks may hold a key to the length of time before the next recession.

The U.S. economy remains generally solid, but the effects of tax cuts are fading, and earnings growth is expected to slow. The 2017 tax cuts boosted corporate earnings, but they’ve also increased federal debt levels. Investor sentiment is likely to swing in a wide range in 2019, as we predicted in our U.S. stocks and economy outlook, but animal spirits have been dented and bouts of exuberance are far less likely this year. Meanwhile, strong 2018 earnings growth won’t be repeated in 2019, partly because last year’s earnings set such a high bar: After rising more than 20% in 2018, year-over-year S&P 500® index earnings growth is expected to be negative in the first quarter, and to grow by single digits in the remaining quarters of 2019.1

Interest rate concerns have eased. The Federal Reserve has raised short-term interest rates nine times since 2015, but Fed officials recently have suggested they don’t plan to raise rates again anytime soon. In our 2019 fixed income market outlook, we said that 10-year Treasury bond yields probably had peaked for this tightening cycle at 3.25%. We now expect 10-year Treasury yields to trade in a range of 2.25% to 2.75 until we see signs of inflation picking up, or concerns about global growth subside.

Around the world, policymakers are exploring ways to increase economic growth in their countries, including tax cuts. If successful, these measures could keep economic growth moving higher for a while longer. However, much depends on the outcome of trade talks, including the U.S.-China talks and a looming trade dispute over U.S. auto imports from Europe and Japan.

What investors can consider now

  • Consider rebalancing your portfolio back to its long-term asset allocation targets, if it has been a while since you last did so. Rebalancing means buying and/or selling assets to return your portfolio weightings back to their original desired levels—for example, 60% stocks/40% bonds. 
  • We continue to believe that discipline around portfolio diversification and rebalancing will be important in 2019. Recession risk is rising, and stocks historically have posted their weakest performance during the six months leading up to recessions.
  • Within the international portion of your portfolio, consider trimming historically more-volatile asset classes, such as emerging-market stocks.
  • Within your fixed income portfolio, we suggest you consider moving up in credit quality. Volatility may increase in the riskier parts of the market, such as high-yield bonds, if economic growth slows and it becomes harder for less-creditworthy borrowers to make interest payments. We also suggest considering bonds with longer maturities, focusing on an average portfolio duration of roughly seven years.


¹ Based on I/B/E/S (Institutional Brokers Estimate System) data from Refinitiv, formerly the financial and risk business of Thomson Reuters.

Next Steps

Important disclosures:

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Forecasts contained herein are for illustrative purposes, may be based upon proprietary research and are developed through analysis of historical public data.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.

Investing involves risk including loss of principal.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. High-yield bonds and lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

The S&P 500 index is designed to measure the performance of 500 leading publicly traded companies from a broad range of industries.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.