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Month: February 2019

US economy is forecasted to increase at a lower pace in 2019

US economy is forecasted to increase at a lower pace in 2019 – Which business sectors may outperform?

A recent repot on the prospects of the US economy in 2019 compared to 2018 by the Federal Reserve Bank of St. Louis shows that most probably the US economy will exhibit lower economic growth in 2019.
“Despite some crosscurrents, U.S. economic conditions remain favorable. Real gross domestic product (GDP), the broadest measure of economic activity, is poised to increase by about 3 percent in 2018, which would be its largest increase in more than a decade. More impressively, job growth has been exceptionally strong, and the unemployment rate has dropped to its lowest level in about 50 years. These tailwinds have been offset to some extent by declining activity in the housing sector and an unexpected slowdown in business fixed investment.”, Source: https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2018/forecasters-gdp-growth-2019


Key drivers of US GDP growth

In our article about the US stock market a few days ago we wrote that one of the key drivers for the economic expansion in 2019 would be a strong labor market. Four other very important fundamental and macroeconomic factors are:

  1. Exports and imports
  2. Housing starts
  3. Business fixed investment
  4. Consumer spending

Source: https://ihsmarkit.com/solutions/us-gdp-growth-forecast.html


According to the prediction of IHS Markit the US GDP growth is expected to stabilize near a growth rate of about 2% in 2019 and 2020. If we compare this forecast to the growth of about 3% in 2018, the biggest growth in a decade, then yes, the US economy will probably exhibit an economic slowdown in 2019.
What Are Professional Forecasters Predicting for 2018-2019?
Actual Forecast
Percent Change (Q4/Q4) 2017 2018 2019
Real Gross Domestic Product 2.5 3.1 2.4
Personal Consumption Expenditures Price Index 1.8 2.1 2.1
Percent (Average, Q4)
Unemployment Rate 4.1 3.7 3.6

SOURCES: Federal Reserve Bank of Philadelphia and Haver Analytics.


The above table forecasts that in 2019 the real GDP growth in US could be 2.4%, less than the 3.1% expected growth in 2018. If this scenario is to become a reality an important question investor should ask is which is about the current stage of business cycle in the US economy and which business sectors could outperform in 2019.
Four stages of business cycles
Business cycles have four phases:
• Trough
• Expansion
• Peak
• Contraction
The US economy is most probably somewhere between the peak and the contraction phases of the business cycles. In the peak phase best sectors in this phase include energy, utilities, healthcare, and consumer staple as the economic growth is slowing. In the contraction phase the economic activity and corporate profits are declining and interest rates are climbing as the Federal Reserve aims to fight inflationary pressures in the economy. But there is a major problem about this economic theory. There are no severe inflationary pressures in the US economy, and corporate profits at least for the fourth quarter of 2018 seem to be very strong, with many companies beating the estimates on both EPS and revenue.

Can economic theory be validated by recent US stock market performance?
If the US economy is indeed in the latest stage of business cycles, in the contraction phase, then energy, utilities, healthcare, and consumer staple business sectors should have performed better than other business sectors. What does the reality tell us about this economic theory?

    Stock Sectors   3 Month % Change
    Communications

+2.08%
Consumer Durables
-9.93%
Consumer Non-Durables
+2.88%
Commercial Services
-8.20%
Electronic Technology
-7.37%
Energy Minerals
-7.19%
Finance
-4.39%
Health Services
+2.29%
Retail Trade
-4.24%
Technology Services
-7.32%
Transportation
-4.29%
Utilities
+2.30%
Data as of February 8, 2019, Source: https://money.cnn.com/data/us_markets/

From the above table the economic theory is fully validated by the US stock market performance for the time period of last 3-months. Utilities, Health Services and Consumer Non-Durables stock sectors have outperformed compared with other stock sectors. The only sectors that is not fully in accordance with economic theory is Energy. Still three out of four sectors described above are a significant statistical number, hard to ignore.

We cannot be certain that the performance of these stock sectors will continue in 2019. But many times, the stock market tends to discount important changes in the broader economy, several months before official economic data is released. The partial US government shutdown will have a negative impact on the US GDP growth in 2019, and it is too early yet to make any prediction. It is interesting though that the 3-month performance of the stock sectors mentioned above seem to validate the idea that economic slowdown for the US economy could be a reality in 2019.


Stock market tips making huge difference on trading

Stock market

Stock market tips

Trading is a very dynamic activity, job, and task with a focus on psychology and developing an edge is important for a solid making money strategy. What many traders do though is letting their psychology and emotions change their decisions and place trades that do not fit their criteria. Without a written trading plan and the commitment to stick to it daily, letting emotions take control can ruin the most effective strategy in the world, supposing there is one. In this article, we will refer to three tips related to psychology that successful traders are aware of and the solution to them to implement trades unaffected by the daily financial news and distractions.

The three tips are the following ones:

Revenge trading

Focusing more on losses than on gains

Not changing the trading strategy when market conditions change

Stock market trading

Let’s start with number 1, revenge trading. If you ask any trader if he/she has ever made any revenge trading, chances are that the reply will be yes. Revenge trading is when an open position, either long or short hits its stop-loss, the trader has a loss and the open position closes, yet very soon the trader reopens a new position following the initial opinion about the market direction. In a strong rally, if a trader is short on a stock, and the market makes new highs, then most probably a short position will incur losses. Reopen another position going against the trend is too dangerous and risky. It is ok to accept losses, it is part of this daily financial game called online investing. But revenge trading should be avoided at all costs as it shows that the trader has a very weak characteristic, he/she does not have a trading plan to stick with and more importantly does not have a money management plan. A loss of 5% or 10% is acceptable. But a loss of doubling this amount when market conditions are highly volatile choosing the same trade within a few minutes seems an amateur move, not a professional one. Avoid revenge trading to survive to trade in the long-term.

No one likes losses when it comes to trading. But even top traders incur losses. A trader must not feel bad or disappointed when a loss happens. Trading is about risk and management of it. There are no guarantees that trade will lead to profits. And there should be no sad feelings. On the other hand, the best practice is for any trader to be humble and treat gains as the reward of his/her financial analysis. Forget losses quickly. They are part of the trading game. Use losses to become better in the future, as input for evaluating your trading strategy and its effectiveness.

The effectiveness of the trading strategy is measured only by the results. When market conditions change and trend reversals occur the bias of sticking to the prior trend, which now is history is very strong. Being not adaptive to market conditions because of your analysis that the market should have the direction you think is a great psychological trap. The market does not care what you think it should do. Be always flexible. Adapt to market conditions. Accept you are wrong now. Trade with the trend may seem many times irrational, but statistics have shown it is the wisest trading strategy. Do not simply get stuck in opinion, rather monitor what the market is doing to make money with increased odds.