There’s no shortage of dangers threatening to short-circuit the 10-year bull market. They range from a possible surge in inflation to trade wars to a potential collapse in corporate earnings growth. But in predicting further gains for the record-long US economic expansion, top economist Allen ­Sinai tells Bottom Line Personal that none of those threats will stop the stock market from returning an impressive 20% this year, as measured by the S&P 500, and continuing to defy the bears in 2020…2021…and potentially even longer. 

Here’s what Sinai sees ahead and how it could affect your investments and your financial health… 

Uncharted Territory

We are in historic, uncharted territory. Both the economic expansion and the bull market have lasted more than a ­decade, twice the length of the average upward cycle. Many investors are skeptical that this can keep going because the expansion has never matched the rate of robust growth of previous expansions and has often felt slow and fragile. But I see a resilient economy that is back on firm footing after last year’s soft patch and despite recent scares.

The economy is growing fast enough to support solid growth in corporate profits and historically low unemployment but slow enough to prevent inflation from surging and to keep the Federal Reserve from raising rates. 

Bull markets historically die from specific threats. I see scant evidence that any of the five major threats—one or more of which have been responsible for killing ­every previous bull market since World War II—will end this one soon. I predict several years of growth ahead and little chance of a recession or bear market.

The Five Threats

Threat: ­Surging inflation. This is the classic way most economic expansions and bull markets end. A spiral of rising wages and higher prices force the Fed to aggressively hike interest rates, sending the economy into a recession and dragging down corporate profits and stocks with it. But inflation, as measured by the Fed’s preferred inflation gauge, has been well below its 2% annual target and is unlikely to rise much. Reason: New technology and ­innovation—ranging from Amazon to Yelp—spur global competition and help keep a lid on prices and wages. Smartphones and websites enable consumers to instantly find the cheapest deals on consumer goods. 

Threat: Global economic slowdown. Although much of the rest of the world is experiencing subpar growth, the global economy is not sluggish enough to derail the US economy. Global economic growth, which was 3.5% in 2018, will drop a bit to 3.3% this year. But despite trade conflicts with the US, growth in China should bottom out in 2019, thanks to massive monetary and fiscal-policy stimulus. And the weak European economy should improve because governments there are relaxing fiscal austerity measures and increasing government spending.

Threat: Bubble valuations. I do not see the kind of euphoria and exorbitantly high prices that characterized the ­technology-stock sector in the late 1990s or the housing market in 2007. Currently, the stock market is fairly valued. My estimate for the price-to-earnings ratio (P/E) of the S&P 500 for the next 12 months is 16 to 17, close to its long-term historical average of 16.8 and far below market P/Es that were above 30 at the start of the last two bear markets. 

Threat: Corporate earnings collapse. Last year, S&P 500 corporate earnings rose 23.5%, thanks to robust economic growth and tax cuts. Earnings growth this year will be much more modest, but as a result of renewed vigor in the economy, largely from increased consumer spending, it will be strong enough to keep stock prices rising. 

Threat: Trade wars. Some analysts were recently predicting that mounting tariffs between the US and China—as well as the US and Mexico—could lead to a recession. An extended period of tariffs would have significant ­consequences, adding to US corporate costs, raising some consumer prices and potentially reducing annual gross domestic product (GDP) growth by as much as one-half a percentage point. But the impact relative to continued strong consumer and business spending and increased federal government spending—by far the main drivers of US economic growth—would not be enough to tip the US into a recession. However, tariffs could slow down earnings growth of some large US exporters—including technology and industrial companies—and continue to hurt stock prices.

Key Economic Indicators

Here’s what I expect for the rest of this year and beyond…

GDP: After a slump in the fourth quarter of 2018, when GDP fell to 2.6%, the US economy grew at 3.1% in the first quarter and likely will grow by 2.8% for 2019. In 2020, GDP likely will increase by 2.7%. 

Unemployment: The US should be able to add an average of 170,000 jobs a month—mostly in health care, leisure and hospitality, and business services—pushing down the unemployment rate to 3.3% by the end of 2019 and 3.4% next year, compared with 3.6% in April. 

Inflation: Inflation will remain exceptionally tame, running near 1.8% for 2019 and 1.9% for 2020. I don’t expect it to break the Fed’s 2% target until well into 2021. 

Outlook for Stocks

I expect the S&P 500 to return 20% for 2019 including dividends…and the Dow Jones Industrial Average to return 18%. A stronger-than-expected economy will boost corporate earnings from S&P 500 companies by 7% in 2019 and 6% in 2020. Best sectors… 

Health care. Many stocks in this fast-growing sector have lagged over fears that a government-run “Medicare for All” plan would replace the current system. That’s very unlikely to happen.

Technology. Just look beyond FANG (Facebook, Amazon, Netflix and Google parent Alphabet Inc.), stocks whose valuations are stretched and that face regulatory threats. 

Avoid: Stocks of utilities and ­consumer-staples businesses such as food manufacturers. They will lag the overall market as investors focus on faster-growing companies. 

Outlook for Bonds

The Fed likely will not raise its benchmark interest rate this year from the recent target of between 2.25% and 2.5%, and I expect perhaps a one-quarter-point rate hike in 2020. Yields on 10-year Treasuries are likely to remain low and wind up 2019 at 2.75%, slightly higher than they began the year. 

Keep bond maturities short because you get very little additional yield by holding longer-term bonds. And if inflation takes an unexpected jump, long-term rates will spike sharply, resulting in bond losses.