Looking ahead: Our chief global economist's take on what could affect you financially in 2019

Photo from Nasdaq where we presented our outlook for 2019.

2019 economic outlook: A year for optimism and caution

An easy, informal way to see how the economy is doing in your city is to look at the skyline. If you see a lot of construction cranes, it’s usually a good sign for the economy. It means that a lot of new buildings are going up, and there is money and resources to put to use. And it means new jobs too. “With the real US economy booming and a red-hot job market, I’m optimistic. I can see US economic growth continuing well into 2019,” says Bob Baur, chief global economist for Principal Global Investors.

Ask most economists how they’re feeling about 2019, and you’ll hear things like “slowdown” and “weakening.”

Baur sees things differently. He recommends caution when thinking about your investments though, because 2019 could be a year of contrasts between the economy and financial markets. “There’s every reason to believe that the US and global economies can continue to produce reasonably strong growth,” says Baur. “But markets could still struggle in 2019 because of what’s happening with interest rates and monetary policy.”

This means that businesses and consumers will be doing well, but the stock market could still see some really bumpy patches. You’ll want to make sure your retirement portfolio and your pocketbook are ready.

Interest rates and your investments

Interest rates have been low for about a decade. As they increase, they affect the financial models that professional investors use to figure out how much to pay for a financial security like a stock or bond. As interest rates go up, the models tend to tell analysts and portfolio managers to pay less for a security. When they adjust the price they’re willing to pay, a stock’s price can drop. And that means your 401(k) could see some market turmoil, even though the economy and most companies are doing well.

“Investors are factoring in these new higher interest rates and trying to figure out what stocks and bonds are worth given this new and changing information,” says Baur. If you select the funds in your 401(k), you can help combat volatility by having a diverse mix of equities, fixed income, and other asset classes. If you’re in a target date fund, the portfolio manager is adjusting those things for you. Your financial advisor can help if you’re uncertain about your options. You can also look for assets or funds that are more tied to the real economy. Things like commercial real estate or commodities.

Interest rates and your pocketbook

In 2019, interest rates could also affect your pocketbook, since they’re essentially the price of money. So if you have money in a savings account or a certificate of deposit (CD), higher rates mean you could be getting paid more for that money. On the flip side, if you’re borrowing money, high interest rates aren’t so great because it will be more expensive for you to do so. Your strategy for dealing with higher interest rates in 2019 depends on your circumstances.

If you’re saving or investing, Baur recommends finding those higher rates sooner rather than later. “If the stock market struggles too much in 2019,” says Baur, “it may be a factor that pulls interest rates back down.” See what you’re getting on your current savings account, then check around to see what others are paying on similar savings accounts. You may find a better deal.

If you’re borrowing money for something like a car or a house, know your options. Check loan and current interest rates through online comparison tools to get the best deal.

But keep in mind that everything is relative. While interest rates are higher than they were a few years ago, they’re still low by historical standards. For example, an average 30-year fixed-rate mortgage is currently around 5%. In 1981, that 30-year fixed-rate mortgage was closer to 18%.1

Next steps:

  • Check your financial plan for 2019. If you’re thinking about a loan, keep tabs on interest rates and comparison shop. Don’t pay more than you have to.
  • Refresh your saving strategy. With interest rates on the rise, there may be more attractive places to put your money. Even a different savings account could offer a higher rate, so look around.
  • The new year is a good time for a fresh look at your retirement funds. Check in with your financial advisor about adjusting your investments to stay on track with your retirement goals.

1 Source: Freddie Mac, http://www.freddiemac.com/pmms/pmms30.html

The commentary represents the opinions of Principal Global Investors. It should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.

Investing involves risk, including possible loss of principal. Asset allocation and diversification do not ensure a profit or protect against a loss.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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