Preparing for the Crunch — 2019 and Beyond

In my March 2018 article “Economic Outlook for 2019 and Beyond,” I discussed several risks to the US Economy that could hit us in the new year. I forecasted much uncertainty and risk in 2019, but I did not anticipate so much of that risk to spill into 2018. It seemed too early.

In just a few short months, many of the problems I thought would come in 2019 have arrived. Part of this is due to poorly timed economic policy. Trump’s tariff threats in October 2018 triggered a huge market sell-off which we have not yet recovered from. Additionally, the Fed’s gradual interest rate increases are pulling down equities and pushing bond yields higher, so this has an overall chilling effect on asset valuations. And the government shut-down and an upcoming Democrat-controlled House are further reasons to wonder what the United States will look like in 2019. It is a very fragile time for our country.

I have long espoused the buy-and-hold philosophy. Even with all the bad news about stocks and tariffs, I held on to my index funds and was confident that the gains I had earned over the last few years would exceed any of the near-term losses. I was wrong. I saw losses on simple S&P500 funds I had bought 2–3 years ago. In a short timeframe, all the gains of the last few years vanished.

Will the gains come back? Most likely yes, but only time will tell when. But the fact that the gains could disappear so quickly and so violently made me wonder if there is something systemically wrong with the markets. I broke my own rules and sold some of my holdings, thus papering out some losses (which will reduce my tax bill on some other gains I cashed out in 2018). Overall, I’m still up for 2018 but the losses in December didn’t make it easy.

The consumer is still spending aggressively. Many consumer companies will likely report good Q4 earnings as we close out 2018, and this may provide some boost to the market. Consumer spending is not an indicator of long-term health, though. If spending is fueled by borrowing, we may see a subsequent drop in spending as people begin paying off debt.

My advice to my friends is to prepare for winter. There is no need to do anything radical (perhaps hedge against volatile positions in the markets, but no need to sell everything). We can do some smart, simple things between now and mid-2019 to position ourselves for the crunch. Here are a few things I’m recommending as we go into 2019.

• Pare back expenses and increase your cash holdings. Extra cash will be helpful to buy bargain investments later.
• Sell stuff you don’t need on eBay/Craigslist while consumers are still spending like no tomorrow.
• Exploit consumer deals on stuff you do need. As companies struggle to hit their annual quotas for 2019, they will likely offer huge deals (e.g. 50% off storewide, $500 to open a bank account, etc.). If you need (and I mean, really need) these items, pick them up for some quick savings.
• Delay large purchases until absolutely necessary. Do you really need that new car?
• Protect your health. It’s your most valuable asset, and it becomes even more valuable in a down economy.
• Ratchet up your professional development (learn new skills, grow your network) more aggressively. This will hedge against risk in a declining job market.
• Consider dollar-cost-averaging into defensive investments (S&P500, Bond funds, etc.) that are now “cheaper” in the downturn. This way, you are investing gradually and you can more easily manage risk and losses.

The above list isn’t anything fancy, but it offers an easy way to prepare for tougher economic times. Cross your fingers for 2019, and prepare for a protracted fight. Fortunes are made and lost in a down economy.

Be optimistic about 2019, but cautious. I would love to see a “miracle rally” in 2019, and see the world overcome its trade differences and punch through the year with massive growth. But that’s probably not going to happen, so we must prepare ourselves.

Happy New Year everyone!