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2019 Global Economic Outlook

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JEFF KLEINTOP: Global growth may slow in 2019 as worsening financial conditions combine with full employment and rising prices. Global stocks may peak sometime in 2019 if global economic indicators signal the gathering clouds of a global recession.

For all the concerns about trade policy, Brexit, and other issues, the major declines in the stock market in 2018 were really driven by inflation and interest-rate concerns, and so these are the indicators investors need to watch most closely in 2019. 

In the past, when the unemployment rate and the inflation rate converged to become the same number--signaling an overheating economy--it’s marked the start of a prolonged downturn for the stock market and led to a recession about a year later.  Fortunately, there’s still about a 1% gap between the unemployment rate and the inflation rate in major economies like Germany, Japan, the United Kingdom, and the US, but that gap does bear watching as 2019 unfolds.

Another leading indicator, the yield curve, is also showing a narrowing gap, and these gaps are going to be something we need to watch very closely in 2019, as they signal a potential peak in the global stock market.

Three key takeaways for investors in 2019 include: Number one, international stocks may continue to see heightened volatility and may peak in 2019 if leading economic indicators continue to follow their current path; two, consider reducing volatility in your portfolio by reducing some of the more volatile asset classes such as emerging market stocks; three, investors should consider rebalancing their asset allocations back to their long-term strategic targets.

Usually late in the economic cycle we often see reversals between long-term trends and asset classes, and that may begin to favor developed market stocks over US stocks, value over growth, and large-company stocks over smaller company stocks.

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Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

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