ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: And we do bid you good evening, everybody. And happy New Year.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Absolutely.
GRIFFETH: 2019 already. It’s the time of year when usually it’s filled with promise.
HERERA: That’s right. But for investors, it’s also filled with questions about the market, the economy and your money. So, tonight, we’ll try and provide answers for you by looking into the future as best we can.
GRIFFETH: And we begin tonight with the stock market. And some key things to watch in the months ahead.
Here is Bob Pisani.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Cash, IPOs and maybe another Amazon deal.
Here’s three predictions for 2019.
First, cash will offer a competitive return, compared to stocks and bonds. You know, it started this year, suddenly you could get 2 percent on a bank CD, but flat longer term rates and global growth slowdown will combine to make cash a competitive investment for the first time in more than a decade.
Second, big unicorns like Uber, Lyft and Pinterest will indeed IPO in 2019, but at a much lower valuations than they wanted. There is a potential ocean of new IPOs coming in 2009. We could come close to the record year of 2000 when close to $100 billion was raised, but significant haircuts up to 20 percent will likely be required to get many of the deals done.
Finally, let’s have a little fun here. The big M and A deal in 2019, Amazon buys Target. Gene Munster floated this idea a year ago. But it’s more compelling since then.
Amazon is up 30 percent this year. Target is down. Target has a $34 billion market cap, nearly three times the size of the $13 billion Whole Foods deal. But the chance to get access to a huge retailer where Amazon can perfect electronic checkout and significantly cut target’s $350,000 employees and then turn target into a turbo charged retailer, well, that’s a chance Amazon may not pass up.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
HERERA: When talking about the stock market, it’s important to also discuss the outlook for the economy, which experts say has grown cloudy.
Steve Liesman takes it from here.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: One question dominates the economic outlook for 2009, who’s got it right? The market, which seems to be forecasting a severe slowdown or the Federal Reserve, which sees a more modest one. There is data on both sides as the year drew to a close.
Many business and consumer confidence surveys turned down but the hard data on jobs, economic growth and consumer spending stayed strong. The best prediction probably takes a little from both sides.
First, look for GDP to slow from above 3 percent in 2018, closer to 2 percent or trend next year. 2019 will not bring the recession the markets fear. There is too much stimulus in the system for that. But it’s likely to use to see a slowing of growth as the effects of stimulus wear off in the second half.
Second, the unemployment rate should continue to tick down and job growth remains strong for the first half and stabilizes as the year moves along.
Finally, the Fed will find reasons to hike rates just one more time in 2019 and probably launch into an extended period of pause until it feels more confident in the economic outlook.
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman in Washington.
GRIFFETH: Certainly one of the biggest economic issues of the past year was trade.
And as Ylan Mui tells us now, it will likely remain a focus in 2019.
YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Trade turmoil rocked the markets in 2018 and you can bit it’s going to continue into the new year.
First, China deadline drama. U.S. Trade Representative Robert Lighthizer leading the negotiations with Beijing. And the two sides are facing a March 1st deadline to reach a deal. At stake, U.S. tariffs on $250 billion in Chinese goods and retaliation from China. Deal or no deal, expect plenty of posturing and yes, lots of testy tweets along the way.
Second, expect a rocky road ahead for the new U.S., Mexico and Canada trade deal. The USMCA will need to get approved by Congress next year. But so far, Democrats have been pretty skeptical. They’re looking for stronger labor and environmental protections.
And, finally, bilateral trade deals. Look for the Trump administration to move forward on bilateral deals with other countries. Trade talks with Japan and European Union may ramp up. If they go well, that could put the brakes on the threat of new auto tariffs. The administration could lift duties on foreign steel and aluminum.
One thing is clear, though. Trump sees tariffs as a way to gain the upper hand in negotiations.
For NIGHTLY BUSINESS REPORT, I’m Ylan Mui, Washington.
HERERA: Trade and China are intertwined, which is why developments in the world’s second largest economy are closely watched by investors around the globe.
Eunice Yoon is in Beijing.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The trade war dominated market sentiment this year. So, no doubt whether the U.S. and China can work out a trade deal will be a major theme in 2019. The tariffs truce between President Trump and Xi expires March 1st. Beijing could replace its made in China 2025 industrial strategy by then, addressing Washington’s criticism and potentially stopping rising tariffs from you hurting economic growth here.
Second, expect more system stimulus measures but targeted. Beijing is wary of the dangers of too much debt. China’s economy has been slowing for reasons unrelated to the trade war like a government campaign to rein in financial risk.
And finally, investors will be able to buy for more Chinese stocks. The government wants foreign money to come in. China would link the Shanghai Exchange to London, and the S&P Dow Jones indices plans to add Chinese shares to its global benchmark in September.
For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon in Beijing.
GRIFFETH: And joining us now to talk about what may be in store for the economy and the stock market in this New Year: Beth Ann Bovino is chief U.S. economist at S&P Global Ratings. John Lynch is chief investment strategist at LPL Financial.
Good to see you both. Happy New Year.
BETH ANN BOVINO, CHIEF U.S. ECONOMIST, S&P GLOBAL RATINGS: Good to be here.
JOHN LYNCH, CHIEF INVESTMENT STRATEGIST, LPL FINANCIAL: Happy New Year.
GRIFFETH: Beth Ann, clearly, the stock market in December was trying to perhaps us it’s expecting a slower growth economy in 2019. What do you think?
BOVINO: We do think — I guess we’re in agreement with the stock market. We do see — 2018 was a very good year. It was a nice reading probably close to 3 percent. We think it’s slowing in 2019 to above trend. We’re looking at about 2.3 percent.
So, we’re a bit more optimistic than markets are. But some of the drags that we see as a factor is, one, we expect to see that fiscal stimulus start to filter out of the system. That’s a weight on growth. The Fed — even though the Fed indicated that they are going to take a slower pace, it still means that they are going to raise rates. And that’s also a drag on growth.
We’re going to keep an eye on housing to see what happens there —
GRIFFETH: All right.
BOVINO: — because we have seen some weakness there. Will that continue in 2019?
The last point to make is those trade — that trade dispute hasn’t ended that’s another drag for people to worry about.
BOVINO: John, you think that growth will be sustained through fiscal policy. But what about the trade issue? How much will that override any kind of fiscal policy initiatives in the New Year?
LYNCH: Sure. Thank you, Sue.
I think trade plays a big role from a certainty standpoint for businesses, because we can’t discount the fact that immediate expensing is an amazing incentive for businesses. So, we saw a 10 percent business investment in the first half of 2018 basically ground to a halt in the third quarter. So, to the degree, I’m not even looking for a solution.
But as long as businesses can see a path toward progress on trade, whether it’s elimination off joint ventures, whether it’s transfer of designs if you will, any sort of progress I believe businesses will take advantage of the incentives because it really comes down to for economic growth really to continue, we need to see capital investment so we see that improvement in productivity. So, you can increase output without the threatening wage situation. I think that’s what really concerns policymakers in the latter part of 2018. I think that’s focus on wages in 2019 as well.
GRIFFETH: Your growth estimate for next year is 2.5 percent to 2.75 percent. You’re higher than Beth Ann and you’re expected return in the stock market is 8 percent to 10 percent. That’s a pretty normal year.
Given the volatility at the end of 2018, I guess, you’re expecting us to go back to normal?
LYNCH: That’s exactly right, Bill. We’d have to redefine normal after what we experienced in 2018 wouldn’t you agree? But yes, we are looking at, at LPL, we are focused on earnings and income to help our investors achieve their long-term goals.
So, to the degree that we had 3 percent economic growth or so last year, 25 percent profit growth last year we’re looking for normal returns in economic growth, call it 2.5 percent, slightly better than trend for the cycle. And even though earnings should be growing in the 6 percent to 8 percent range this year, be mindful that that is at or slightly above historical averages.
So, the messages we send to investors is that we have record profits from the last year, growing at or slightly above historical averages. Yet, we’re still discounting the profit growth at interest rates which are below averages. So, we think that will be positive for investors.
HERERA: Beth Ann, in 2018, we saw, as Bill mentioned, the volatility. We also though saw a huge downdraft in oil prices. As we’re in this New Year, what impact do you think that will have on overall growth? And what impact it might have on the economy?
BOVINO: Well, in terms of the drop in oil prices, well, the problem with the oil prices is that when it goes down it usually goes right back up. So, let’s see how that holds.
Keeping — keeping oil at around say, $50 for West Texas Crude, for example, or maybe about $60, that’s manageable. That’s good for the big energy sector that we have.
But it also is something that’s affordable for most households to basically go to the gas pump, fill up and then go to the mall. That’s manageable. That’s what we are expecting for 2019.
Of course, things could go wrong. With the Middle East — Middle East tension increasing, that is something that could be a weight on growth. There is a number of shocks that we see that could go wrong this year. One, of course, does the Fed make a policy mistake? Do they either go too fast or too slow causing a problem in the future.
BOVINO: Another issue could be indeed, what happens with oil prices. Could we see another spike, say 100 or 110-plus that can’t be ignored and that certainly would — together with the trade dispute, cause this expansion to take a break.
GRIFFETH: All right. Beth Ann Bovino with S&P Global Ratings, John Lynch with PLPL Financial — good to see you both. Again, happy New Year.
BOVINO: Happy New Year.
LYNCH: Thank you. You as well.
HERERA: The tech and financial sectors are two of the most influential in the market. Here to tell us what’s in store are Wilfred Frost on the banks, but we’re going to start with Josh Lipton on technology in San Francisco.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The tech sector started the year off with bang and then fell hard on a range of worries from trade to rising rates.
Here are three predictions for 2019.
One, Amazon’s cloud drives consolidation. Amazon is making new moves in the cloud, introducing new server chips and bringing its cloud technologies to the data center. That’s going to force rivals to react. For example, Google’s new cloud chief, Thomas Kurian, may have to buy other companies to catch up.
Two, Google makes moves in China. Google CEO Sundar Pichai was grilled on Capitol Hill about possible plans for a centered search engine for China. That doesn’t look likely but Google will keep trying to attract more of China’s 800 million internet users with apps, investments and listening deals.
Three, Apple shifts the narrative. Apple will begin to build a new case about why it’s a smart investment. Offering new data into metrics like royalty and engagement as it tries to shift investor attention away from unit sales and to its strengths like the faster growing services business.
For NIGHTLY BUSINESS REPORT, I’m Josh Lipton, San Francisco.
WILFRED FROST, NIGHTLY BUSINESS REPORT CORRESPONDENT: The shake of the yield curve, credit risk and valuations are the key things to look out for to decide whether sentiment towards banks can improve in 2019.
First, the shape of the yield curve. Banks tend to borrow short and lend long. So, a steeper curve creates bigger profits for them. But questions as to whether the Fed will keep hiking and still historically low rates in Europe and Japan have flattened the curve in 2008. Will that continue in 2009?
Second, credit risks. While loan growth has been a little soft in 2018, there’s not been any rise in credit costs for banks. This suggests the economy may be stronger than some fear. If those risks remain low in early 2019, investors may regain faith in the economy and banks also.
Third, valuation. Banks always trade at a discount to the rest of the S&P 500. The 25-year average is a 75 percent discount. They are currently trading though at a 60 percent level compared to the S&P 500 average. Yet, they have made profits every quarter in 2018. If they do the same in 2019, will they enjoy a higher P/E rating?
Finally, one wild card to keep an eye on, politics. With a Democratic House of Representatives, could executives be dragged to D.C. to face more grillings about possible past behavior?
For NIGHTLY BUSINESS REPORT, I’m Wilfred Frost in New York.
GRIFFETH: And still ahead, the road ahead for oil and autos.
GRIFFETH: Who would have guessed the twists and turns that we saw in the oil market in 2018?
Brian Sullivan tells us whether investors can expect more of the same in the months to come.
BRIAN SULLIVAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: 2018 was the year oil prices collapsed, along with the stocks in many major oil and gas companies. All as OPEC tried to reassert its power.
2019 could be very different. Here are some predictions.
One: Oil prices recover but only by a little.
It will take time for OPEC’s recent production cut to impact the market. But ultimately, the drop in exports from Saudi Arabia, along with a likely flattening out of U.S. production should support slightly higher prices. Look for oil to be in the high 50s to low 60s per barrel all by the Fourth of July.
Two, Texas size deal making heats up.
The biggest global players know now more than ever scale matters. Bigger is better when you have to control costs. Look for the Exxon, for Chevrons and other big players to keep selling the assets they don’t want and spending to grab up some of the best acreage in America.
Three, OPEC gets smaller as the NOPEC bill rolls through Congress.
After the country of Qatar called it quits look for another major OPEC player like Iran, Iraq or even both to realize going their own way is the way to go. Also, a bill being pushed in Congress to make oil cartels like OPEC illegal gained steam and could even pass early in the year. If that happens, our relationship about the Middle East could take a significant turn.
For NIGHTLY BUSINESS REPORT, I’m Brian Sullivan.
HERERA: In the air and on the road, the New Year will bring new challenges for the auto and airline industries, from slowing sales in the showroom to rising numbers taking to the skies.
Phil LeBeau has more on what to look for in 2019.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: 2019 is expected to be the year automakers finally see a sizable drop in sales. In fact, many analysts believe the industry will fail to sell 17 million vehicles in the U.S. for the first time since 2014.
Slower sales especially of sedans means GM and Ford are restructuring their operations. Fortunately for the auto makers, trucks will remain red hot, especially mid-size versions. Two new models, the Ford Ranger and Jeep Gladiator will get plenty of attention next year.
So will autonomous drive ride share operations. Waymo will slowly develop service in the Phoenix area. And GM subsidiary Cruz is expected to launch its robo taxi service in northern California.
Meanwhile, analysts expect 2019 to be a year where airports and airplanes are more crowded. That’s because a record number of travelers are expected to take a flight.
In fact, more than a billion people could fly in the U.S. next year. They will pay more to pick a seat, change a flight and check a bag. And while they may complain about feeling nickel and dimed, they are expected to continue booking trips. Why? Because the robust economy and strong consumer confidence means more people will look to get away in 2019.
And while airlines are adding flights over the next 12 months, industry leaders believe planes will be as packed as ever next year.
Phil LeBeau, NIGHTLY BUSINESS REPORT, New York.
GRIFFETH: The housing market starts this New Year a lot cooler than it was a year ago at this time. And as Diana Olick tells you now, there are some new trends worth watching.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: 2018 was a roller coaster for residential real estate, home prices overheated, mortgage rates rose a lot and fell a little, and home sales stalled.
2019 will see some big changes.
First, prices will pull back. Affordability is a bad word in the housing market today, because low supply and high demand push priced over the top.
Now, supply is rising slowly and those big price jumps shrink. Some markets could even go negative. Builders could help with affordability if they put up more cheap homes, but so far, signs are they won’t because of high cost for land and labor.
Second, mortgage rates will rise. They went up, they flat lined, they fell back last month. But the trend in 2019 should be higher, with rates passing back over 5 percent on the 30-year fixed and staying there.
And finally, rents will rise. All this weakness in home sales means more potential buyers will stay put in their rentals. Occupancies are already high, which means rents will remain pricey, especially in the sought after urban markets.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
HERERA: Coming up, financial resolutions for this New Year.
HERERA: The retail industry has been undergoing tremendous change. And the sector could be reshaped once again in 2019.
Here is Courtney Reagan.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: 2018 was a volatile year for retail stocks and the trend could continue in 2019.
Tariff uncertainty. The U.S. and China have until March 1st to come to a resolution on trade. If there’s no deal, tariffs could go up to 25 percent on a long list of products, leading to higher prices for shoppers.
Retailers that sell more domestically sourced products like the large amounts of food sold at Walmart and Sam’s Club will have more cushion to offset the pressure from tariffs goods.
Second, online profitability impatient. Retailers and brands have been spending billions investing in their e-commerce operations, all to play catch up with Amazon. While investors have given retailers some time to invest and improve, patience is running thin.
Strong online sales aren’t enough. Shareholders want to see profitability improve. If it doesn’t, retail stocks will take the hit in 2009.
Third, store closures slow. And 2017 and 2018, retail store closures and bankruptcies hit levels not seen since the financial crisis. But that should ease in 2019. While the big swath of closures should be over, retailers will still be fighting hard for sales growth as competition is higher than ever and rising interest rates make debt payments more expensive.
For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.
GRIFFETH: And, of course, the New Year is a time for resolutions.
So while you’re thinking about eating better or exercising more, don’t forget about your financial healthy.
Sharon Epperson has more on sticking to your money goals in 2019.
SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: More Americans want to get smarter about spending in the New Year.
Fidelity reports nearly one-third are planning to make some sort of financial resolution in 2019. Many are optimistic, too, with 42 percent saying they’re in a better financial situation than a year ago.
KEN HEVERT, FIDELITY INVESTMENTS RETIREMENT & INCOME SOLUTIONS: If the goal is to have more confidence in the financial situation, to sleep better because we are taking control of our personal finances, the mere act of taking and setting a financial resolution and then over time turning it into a habit has proven to really make people feel much better about their situation.
EPPERSON: What resolutions are people making? We went to New York’s Times Square to find out.
UNIDENTIFIED FEMALE: Save more money, and to prepare for the rest of my life.
UNIDENTIFIED FEMALE: To be more thrifty with money probably, especially since this trip cost a lot.
UNIDENTIFIED FEMALE: Just make sure to put stuff away for the future. And yes, not digging into my savings.
UNIDENTFIIED FEMALE: To make more money, definitely. And to save more and not spend it on a bunch of little things.
EPPERSON: You don’t have to make drastic changes to your daily life to make your financial resolution a reality. You can take these steps to help you save more.
Shop around for higher interest rates on savings. You may find a rate that tops 2 percent at an online bank, which is more than 20 times the national average. Direct deposit your pay into a checking account, as well as two or more savings accounts for different goals. And increase your 401(k) or retirement plan contribution by 1 percent or 2 percent this year.
Also, find ways to decrease your spending so you don’t fall victim to common mistakes that keep people from reaching their savings goals. Cut back on dining out. And open that bottle of wine at home.
Review your credit card bill and cancel any recurring subscription that you no longer use. Also, plan ahead for splurges like the summer vacation. Start looking for deals now and put away some funds so you’re not still paying that bill next winter.
Also, don’t keep resolutions to yourself. Share them with a financial adviser or someone you trust, who is going to encourage you to stick to your goals.
For NIGHTLY BUSINESS REPORT, I’m Sharon Epperson.
HERERA: With 2019 here, it might be a good opportunity to add some new names to your portfolio. Our next market guest says his three picks are industry leaders with strong balance sheets and cash flow.
We’re joined tonight by Mike Mussio. He’s president of FBB Capital Partners.
Nice to see you. Welcome, Mike. Happy New Year.
MIKE MUSSIO, FBB CAPITAL PARTNERS PRESIDENT: Thanks for having me here, Sue.
HERERA: A lot of the stocks have been beaten up in 2018.
HERERA: So, maybe you have good entry points. Your first stock is an example of that. Apple, why do you like it?
MUSSIO: Yes. So, Apple crossed the trillion dollar threshold in 2018. Now, it’s 75 percent of that value.
So, people are getting 25 percent off. And not a whole lot has changed with the story. Estimates for 2019 have come in a bit. Growth is expected to slow a little bit next year compared to 2018. But we have known that for a while. And it’s still growth.
And the company is paying a nice dividend. It’s been shareholder friendly for years. And we think that the dividend is probably going to continue to grow at a double digit clip. So, we think Apple is it a fine bet, and it’s trading at 10 times earnings where the market is about 14 times earnings.
GRIFFETH: Another stock that saw a correction in 2018, Johnson & Johnson.
GRIFFETH: In part, over concerns about these lawsuits involving their talcum powder whether or not it contains asbestos and caused cancer in some people. You’re not worried about those costs, though. Why?
MUSSIO: No, it’s such a — there is so much cash flow the company is generating that even the largest kind of number out there, which is near $5 billion or so, it’s probably not going to be that. It’s under appeal. It’s some number below that. And they’re creating operating income of $20 billion a year.
And more importantly going forward, the product in question and kind of as a percentage of sales, if they got rid of baby powder altogether, that would not impact or impair Johnson & Johnson’s outlook. So, here a good example, Bill, of a company that quarter to date, before that happened, was up 5 percent. So, you know, a good defensive name. And then that news came out and now it’s down, you know, 10 percent, 15 percent from where it was.
So, again, a good entry point of a company that’s trading at the market multiple that’s defensive in nature.
HERERA: And, finally, CVX, and you say it has a really good balance sheet.
MUSSIO: Yes. So, if there is a market that was uglier in the fourth quarter than the stock market, it was probably the energy and the oil market. So, if you’re playing here, you want to go with best of breed. And we think that Chevron has the best assets to work with. And their capital expenditures, all of that ran kind of through a few years ago.
So, they’re poised to do well, have strong cash flow. They’re to move a little bit with energy, but you’re getting almost a 4 percent dividend in an environment where the 10-year, you know, 2.75 or 2.8. That’s not bad.
HERERA: All right. Mike, thanks so much.
MUSSIO: Thanks for having me.
HERERA: Mike Mussio with FBB Capital Partners.
And we thank you for watching this special edition of NIGHTLY BUSINESS REPORT. Happy New Year, everybody. I’m Sue Herera.
GRIFFETH: I’m Bill Griffeth. I’m still writing 2018 on my checks. Have a great evening. We’ll see you tomorrow.