There were a few interesting pieces of data from 2018 that are worth sharing.
- Forward Price to Earnings ratio on the S&P 500 dropped to 14.4 times, a level not seen since 2013. Stocks got significantly cheaper by this measure and are well below long-term average P/Es.
- Household debt service ratio dropped below 10%, which is a number not seen since the early 1970s. This means families have more disposable income after paying their debts than we have had in decades.
- Core inflation and unemployment both stayed low throughout the year.
- Interest rates were volatile, but ended the year only slightly higher than they started the year. We do see a very flat yield curve today.
None of this particularly calls attention to the fact that 2018 was the first year since 2009 where we experienced a 20% draw down in equity markets. A flat and at sometimes inverted yield curve can be a precursor to a recession. We are not predicting a recession in 2019, but we do believe that the actions of the Federal Reserve will slow the economy further. As long as inflation stays in check, we expect either zero or one interest rate increases in 2019. We believe that a recession is still more than 18 months out and that stock market returns should be positive in 2019. The big picture is that our economy is still healthy. If trade negotiations progress with China this could provide a substantial boost to equity prices. We will continue to monitor inflation and particularly wage data closely in 2019 as we believe these may drive action by the Fed. As always, if you have questions about markets or your financial future, please give us a call.
From the desk of Kris Carroll, CFA®, CFP®
This article was featured in the Winter 2018 Quarterly Newsletter available here:
 The S&P 500 Index is a capitalization weighted index made up of 500 widely held large-cap U.S. stocks in the Industrials, Transportation, Utilities and Financials sectors.
 The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.
Market Update, Market Volatility