What is the difference between "slowing" and "slow"? I think we need to clarify this distinction to understand our outlook for 2019. The economy here in the US is slowing, as is the Global economy. Peak economic growth may be behind us, but this does not mean that we are facing an imminent recession. We expect to see more of an earnings decline in 2019. Whereas corporate earnings grew at 20% or more in 2018, we expect that to decline to around 5% in 2019.
We do not expect a slow economy; we expect moderate growth. We continue to see full employment and we are starting to see real wage growth. The stock market is buoyed by the prospect of lower inflation, and with the Federal Reserve’s recent communication that it may be getting to the end of its rate hike cycle, has rallied on that good news.
Last year was one of the most volatile years we have experienced in quite some time. December’s “close to bear market” tumble was the worst December since the 1930’s. Uncomfortable, yes, but the strong correction gave investors an opportunity in January to buy into some areas that were no longer over-valued, but now fairly to under-valued. We, in fact, took advantage of that opportunity to place some of our cash into our Value Equity allocations.
Where are we today, as we assess what the rest of the year may offer? I believe that bonds may offer the stability we usually expect from that asset class, and with interest rates staying somewhat stable to lower, we are likely to increase our allocations to bonds. The S&P 500 Index is up +11.03% year to date according to Morningstar – in my opinion a bit too much, too quickly. In a slowing economy there is good reason to expect a slowing of that percentage growth. If the S&P 500 earnings per share are expected to decline, as they are, it is logical to assume that the prices of those stocks will also retreat.
We should expect continued volatility this year, but we do not expect a negative year. Moderate investors may want to take some gains they see in the year to date performance and deploy that gain to cash or into bonds. Many equity ETFs are seeing net redemptions as investors move to lock in those gains.
Global investments may continue to be challenged this year. Europe is facing uncertainty around Brexit, threats of added tariffs, and a general slowing economy; China is facing a slowing economy as well, effecting all of Asia. For both European positions and Asian positions, the strong dollar remains another major headwind.
We will continue to hold a larger position in cash, poised for another opportunity later in the year. In addition, we favor portfolios which are generating dividends and interest, both of which can add to total return in a slow growth environment.
The year to date market improvement has, no doubt, eased many investors’ anxiety. It should be viewed as a reminder that a true investor should have a long term horizon underscored by some informed patience. As always, we recommend the formation of a plan, allocated according to one’s goals and time horizon, with diversification as a core commitment.
Linda Erickson is a Registered Representative of Cetera Advisor Networks LLC, member FINRA/SIPC, a broker-dealer & Registered Investment Advisor.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable: however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
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.
Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
A diversified portfolio does not assure a profit or protect against loss.