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LPL RESEARCH PRESENTS OUTLOOK 2019 FUNDAMENTAL HOW TO FOCUS ON WHAT REALLY MATTERS IN THE MARKETS
Recommended
N&N
Superior economic and profit growth
U.S. STOCKS and fiscal stimulus provide an edge over
Reading:
developed international equities.
Economic growth tailwind and attractive
VALUE
relative valuations compared with growth
may help buoy value stocks.
The #1 Bestselling Finance Book
What to NEW & NOTEWORTHY CYCLICAL STOCKS
Solid economic growth may support
expect
when you re
economically sensitive sectors.
expecting’
Your book club may thank you for Strong growth, attractive valuations, and
EMERGING MARKETS
volatility these recommendations in 2019 potential U.S.-China trade agreement may
1st EDITION help emerging market equities outperform.
T he all-in-one guide that
explains everything you
need to know — and can’t
wait to find out — about the INVESTMENT-GRADE Economic growth may help credit-sensitive
amazing stock market, from
bulls to bears and beyond.
CORPORATE BONDS bonds; added credit risk provides
Completely New & Revised
incremental yield.
MORTGAGE-BACKED Yield benefit relative to rate risk remains
WHAT TO EXPECT WHEN SECURITIES attractive among high-quality options.
THE POWER OF POLICY YOU’RE EXPECTING VOLATILITY GOOD TO GOOD
C
The Federal Reserve is expected to Market volatility will likely persist in Despite periodic slowdowns, business
slow its pace of interest rate hikes 2019, as investors digest the many spending was solid in 2018 and Tax reform benefits starting to fade and cycle
SMALL CAPS
next year, while fiscal policy should forces impacting the economy, interest is expected to remain so in 2019. is aging, but domestic focus may help early
remain supportive of economic and rates, and corporate profits. Focusing Business spending remains a key in 2019.
profit growth. Uncertainty regarding on the fundamentals and remembering factor supporting economic growth Offer some potential diversification while
INTERMEDIATE-TERM
trade policy remains a risk, although the importance of diversification will as we look for this cycle to elongate. HIGH-QUALITY BONDS avoiding the rate risk of long-term bonds.
we expect an eventual resolution. be key to navigating any volatile times.
Still potentially attractive for strategic
CLASSICS BANK LOANS
investors, but high issuance, weaker
investor protections raise some concerns.
New for 2019:
Don’t count out these timeless tales; May be supported by further economic
these investments should provide HIGH-YIELD BONDS growth, but we prefer a combination of
a solid background to portfolios equities and high-quality bonds.
OOP
Less economically sensitive sectors may
U.S. DEFENSIVE
STOCKS offer lower return potential amid solid
economic and profit growth.
After a sustained period of strong
GROWTH STOCKS
performance compared with value, the
growth stock rally may be due for a pause.
OUT OF PRINT DEVELOPED Growth in Europe has slowed while political
INTERNATIONAL STOCKS challenges are rising.
Might have to wait for DEVELOPED Valuations remain very rich and declining
THE THREE HABITS OF HOW TO GAIN PROFITS the next edition; these INTERNATIONAL central bank accommodation may create
HIGHLY EFFECTIVE GROWTH RATES: THE STORY OF BONDS & INFLUENCE STOCKS BONDS a challenging environment.
investments aren’t
Consumer spending, business A rising rate environment may Expectations for still solid corporate
gaining traction yet With rates expected to rise, the
investment, and government spending prove challenging for bonds, and we profits and steady economic growth LONG-TERM HIGH-
QUALITY BONDS diversification benefit does not adequately
should provide continued support for expect flat returns for the Bloomberg support our forecast of 8–10% returns
compensate for added rate sensitivity.
gross domestic product (GDP) growth Barclays U.S. Aggregate Bond Index. for the S&P 500 Index.
of 2.5–2.75%.
1 • OUTLOOK 2019 OUTLOOK 2019 • 2
Preface: Why You Need
This Book
Focusing on What Matters As investors, we have all acquired a certain amount
of experience with everything the economy, markets,
and news headlines may throw at us. So we know
that market declines are normal. We know that we’ll
eventually have a bear market. And we know the
HOW TO USE
economy may slide into a recession before it can pick
back up again. But there’s a big difference between
knowing something and actually going through it.
Actually feeling it. As we also know from experience,
these declines don’t feel good.
The good news is, there are a few strategies to help
us navigate those potentially difficult environments: THIS BOOK
FIGHT THE IMPULSES. There’s a long history of many
investors selling near the bottom. It can be difficult
to fight that urge, but a sensible plan that’s realistic Divided into four broad chapters, a foldout
about risk can help you stay on course. There’s a infographic, and interspersed with helpful
natural tendency to overestimate risk tolerance when sidebars, FUNDAMENTAL: How to Focus on
risk is low. A realistic assessment can make it easier What Really Matters in the Markets presents
to navigate challenging periods. our expectations and guidance for 2019 in a
way that’s easy to digest. Be on the lookout
BLOCK OUT THE NOISE. The 24-hour news cycle is
for these other elements as you read:
aimed at creating an emotional response that will
keep the audience tuning in. Not getting caught
LET’S RECAP: These boxes provide a high-
up in the news cycle and having sources that help
level summary of what we saw in 2018.
provide perspective can make it easier to avoid costly
decisions driven by strong emotions. BREAKING IT DOWN: These sections
AFTER NEARLY 10 YEARS of witnessing the U.S. economy and present our forecasts for bonds and stocks.
stock market recover—and thrive—investors are starting to wonder BELIEVE IN THE FUNDAMENTALS. Stock prices ultimately
if we’ve seen all this expansion and bull market have to offer. Despite depend on corporate earnings growth. If you believe HOW TO INVEST: Our high-level
the market weakness we saw at the end of 2018, at LPL Research we that companies will continue to grow earnings, you investment recommendations based
expect the U.S. economy to grow in 2019 and support gains for stocks. implicitly believe that stocks are likely to rise in the on our expectations.
Given we are a decade in and likely nearing the end of the cycle, long term.
however, it is a good time to start thinking about what the next phase WHAT IF…: We also present a few of
This final point is arguably one of the most our unexpected scenarios—while these
for the economy and markets may look like. The intention here is not important, and one we’ll continue to emphasize
to start worrying or assuming the worst, but to remind ourselves that don’t represent our base case, we offer
throughout this edition. Our conviction in the some situational details and consequences
slowdowns and declines—even recessions and bear markets—are a fundamentals supporting the economy and
normal part of our market cycle. And even more importantly, if we’re in the event of a surprise.
corporate profits is driving our forecasts for solid
prepared for any downturns, we can be better positioned to weather GDP growth and positive stock returns. Yet, many CHAPTER SUMMARY: We wrap it all up
any challenges that may be ahead. positive fundamentals could be pressured by for you.
That’s where Outlook 2019: FUNDAMENTAL comes in—because we threatening issues such as trade, monetary policy,
could all use a handy guide when it comes to this market environment. or global politics. As a result, we do expect to see The 2019 edition of LPL Research’s Outlook
We’re here to make sure you’re prepared for what may be around the more volatility, and continue to encourage suitable provides you the actionable tips and
corner, or further down the line, and help you through it all. investors to embrace that volatility for its potential investment recommendations you can
opportunities, rather than fear it. By managing use in 2019 and beyond. This, together
our emotions and staying in tune with market with the valuable guidance of your trusted
signals, we can position ourselves for any financial advisor, can ensure that you stay
market environment. on the right track as you seek to reach
your long-term goals.
3 • OUTLOOK 2019
Trade Activity Holding
fig.1 Up Despite Tensions
1
WORLD TRADE VOLUME, YEAR-OVER-YEAR (YoY)
chapter 1:
7%
6%
Get to Know
5%
4%
POLICY
3%
the Policy 2%
1%
Basics
0%
-1%
‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18
Source: LPL Research, CPB Netherlands Bureau for Economic Policy Analysis 11/30/18
force for the first nine years following the
financial crisis. In the U.S., the Fed embarked on
an innovative monetary policy journey, bringing
its policy rate to near zero and purchasing
assets (known as quantitative easing, or QE).
Global central banks followed, culminating with
negative interest rates in Europe and Japan,
along with further balance sheet expansion
through their own forms of QE.
T TRADE
Trade will likely continue to make headlines in 2019. Though
Fiscal policy, set by the national government, tensions with China remain, progress has been made with South
is typically characterized by tax reform, Korea, Japan, Mexico, Europe, and Canada, which supported
government spending packages, and other positive market sentiment in the third quarter of 2018. Moreover,
legislation impacting businesses (e.g., the the conclusion of the G20 summit resulted in a sort of “trade
regulatory environment). In part due to elevated truce,” whereby the U.S. and China committed to working on
debt levels, fiscal policy changes failed to keep a more lasting trade resolution within the next few months.
pace with monetary policy throughout the Although trade threats may seem scary, trade represents a small
WHETHER IT’S NEWLY IMPLEMENTED, developed world, causing monetary policy to portion of the overall economy and the fiscal measures should
removed, or amended, policy can play exhaust its options over the course of a decade, more than offset the potential negative impact of tariffs in 2019.
an influential role in the global economy particularly in the United States. Government Even though we expect a resolution, if it takes longer
and markets. And since the financial crisis officials have begun to enact new legislation in than expected to reach an agreement then it’s possible that
in 2008–09, policy’s role has become response [see Let’s Recap, p.8]. continued trade discussions could further weigh on market
increasingly important. As a result of these new policies, the U.S. sentiment. The ongoing uncertainty could have a greater
experienced economic growth of approximately impact, potentially slowing the pace of business spending or
Defining Policy 4% during the second and third quarters of 2018,
and projections for total annual growth nearly
the rate at which fiscal stimulus will take effect.
Despite all the attention given to tariffs, world trade has
When we talk about policy, we’re often referring reach 3% for the full year, as measured by GDP. been growing at a steady pace [Figure 1]. Concerns have
primarily to the balance of monetary policy as This positive growth came with a cost, risen relative to supply chains and rising input costs, yet we
compared with fiscal policy. Monetary policy, however. The federal budget deficit is now at continue to expect any negative impact on the U.S. and global
typically implemented by a central bank, such $779 billion, the largest government spending economies to be less than feared.
as the Federal Reserve (Fed), was the dominant gap since the $1.1 trillion shortfall in 2012. If the
Additional disclosures and descriptions are provided on page 26. OUTLOOK 2019 • 6
LET’S RECAP
fiscal stimulus continues to improve economic Markets will be looking closely for hints at HOW TO As part of the shift from monetary to fiscal policy, Congress put several new policies
INVEST
growth, it would increase the tax base and help how far the Fed may push rates in 2019. When in place to support further economic growth in late 2017.
control the deficit; we see growth as needing to considering the Fed’s expected peak for the 2017 TAX CUT & JOBS ACT GOVERNMENT SPENDING PACKAGE
be above 3% to make a meaningful difference. fed funds rate, it’s also important to recognize • Delivered tax cuts for individual • Worth $300 billion over 2018 and 2019
Consequently, we believe policy will continue that although the Fed’s official mandates Although policy alone
1
taxpayers and small businesses,
to play an important role for the economy and are price stability and full employment, should not dictate while making corporate tax rates REGULATORY ENVIRONMENT
financial markets in 2019 and beyond. policymakers must also be cognizant of investment decisions,
more competitive globally • Became less burdensome for many
financial market volatility—one reason why the here are some factors
• Included provisions to encourage businesses, especially in energy
to keep in mind in 2019.
Checking on the Fed Fed’s messaging and actions have consistently
maintained this gradual path. In addition, the
companies to invest in capital projects
(thanks to immediate expensing) and
and financial services sectors
POLICY
Monetary policy may no longer be the Fed must be aware of the impact that higher bring their overseas profits back to the
driving force to sustained growth, but that rates have on the U.S. dollar’s strength, which U.S. (known as repatriation)—providing
doesn’t mean the Fed hasn’t been busy. The FED MAY PAUSE Rates are likely to rise,
can pressure emerging market currencies further stimulus for economic growth
central bank has already begun to remove its
MIDYEAR but not as quickly as
and place their economies at risk relative to the last two years.
accommodative policy stance and was quite food/energy costs, debt servicing, and capital
active toward the end of 2018. flows. For all these reasons, we suspect the FISCAL STIMULUS There is a potential
What to Expect
fig.2
SEPTEMBER 2018: The Fed raised its policy rate Fed will be less aggressive than some are IMPACT EXTENDS for upside surprise on
projecting, and we look for the terminal fed BEYOND 2018 economic growth; business
with the eighth hike since beginning its climb
from zero in December 2015. funds rate on this cycle to peak around 3%. spending may reaccelerate. from Congress
OCTOBER 2018: It began to maximize its balance SPLIT CONGRESS This may favor different
sheet reduction plan at $150 billion per quarter. Chapter Summary IS LARGELY industries but economy The 2018 midterm election resulted in the Democrats taking control of the
House of Representatives and the Republicans maintaining their majority in the
Later this month, Fed Chair Jerome Powell NEUTRAL remains on course.
Considering the Fed’s likely path for interest Senate. We believe there are several important policy implications for investors
stated that the U.S. economic outlook was rates and how that may influence the TRADE POLICY Uncertainty remains; to consider as we look ahead into 2019.
“remarkably positive,” signaling that market economy and markets, the onus is on federal RISKS REMAIN, impact of fiscal stimulus With the Democrats taking control of the House, “gridlock” may in fact mean
interest rates were going to climb, but as long legislators to support the durability of the BUT EXPECTING is still likely to remain a better sense of political balance for many market participants, as it limits the
as inflation remained contained, interest rate current economic expansion. The setting of BETTER TONE more important. potential for the policy pendulum to swing too far in any one direction. We may
increases would remain gradual. Should inflation fiscal policy, whatever the party leadership, also see an infrastructure spending deal and progress on trade, which could
pick up significantly, a more aggressive approach is always complicated, and there will always provide further support for the markets. On the other hand, the debt ceiling debate
would be warranted. His statement that rates
be some policies that raise concerns among may create renewed uncertainty if the Democrats attempt to roll back some of
were still “a long way from neutral,” however,
market participants [Figure 2]. Consequently, the recent tax cuts in order to reach a deal on the federal budget, and increased
weighed on investor sentiment and the markets.
we encourage suitable investors to base scrutiny of the administration may periodically weigh on market sentiment.
DECEMBER 2018: As expected, the Fed closed any investment decisions on existing Providing some additional context, the historical performance of the S&P 500
out 2018 by raising rates one more time to a fundamentals supporting growth in the and U.S. economy, as measured by GDP, suggests the potential for added gains
range of 2.25–2.5%. In an earlier speech, Powell economy and corporate profits, rather under a split Congress and Republican president.
had already reversed his October comments, than acting on speculative headlines
stating that rates were “closer to neutral,” as the cycle matures and the 2020 HISTORICALLY, A REPUBLICAN PRESIDENT WITH A SPLIT CONGRESS
indicating that policy would not be as restrictive presidential election now comes
IS POSITIVE FOR ECONOMY AND STOCKS
as many had previously feared. into increased focus. PERFORMANCE UNDER A REPUBLICAN PRESIDENT BASED ON CONGRESS MAKEUP
REPUBLICAN CONGRESS DEMOCRATIC CONGRESS SPLIT CONGRESS
Thanks to new policies,
16%
14%
the U.S. economy
12%
10%
has experienced
8%
6%
above-trend growth.
4%
2%
AVERAGE S&P 500 ANNUAL RETURN AVERAGE GDP
Source: LPL Research, Bloomberg 11/30/18; Data are from 1950–2017.
7 • OUTLOOK 2019 OUTLOOK 2019 • 8
Businesses Still Showing
chapter 2: fig.4 Plans for Robust Spending
Master the
PLANNED INCREASE/DECREASE IN CORPORATE CAPITAL EQUIPMENT SPENDING*
2
40%
Keys to
30%
20%
ECONOMY
Economic 10%
Growth
0%
-10%
‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18
Source: LPL Research, Strategas Research Partners 11/30/18
*Based on regional surveys. Above 0 indicates more respondents are expecting increases than decreases in the next 6–12 months.
Sustaining Growth Despite periodic slowdowns, business
spending was robust in 2018. If the trend
We believe a combination of positive factors may persists, it’s possible the cycle may elongate
help maintain business and consumer spending even further. Surveys suggest that business
levels that are above the expansion average. spending may grow at a solid rate of about
Overall, the combination of lower individual 7% in the year ahead, such that signs of a
and business tax rates, immediate expensing slowdown could prove to be temporary.* High
provisions, repatriation, reduced regulation, business confidence should support increases
and increased government spending may help in capital equipment purchases [Figure 4].
maintain business and consumer spending An increase in government spending may
Economic
fig.3
levels that are above the expansion average. That provide added support. Growth in federal
Forecasts should more than compensate for slower global
growth, flat housing growth, and uncertainty
spending over the trailing four quarters made its
largest contribution to GDP growth since 2010.
from trade and budget deficits. In addition, While the overall contribution may slow slightly,
REAL GDP (YoY%) 2017 2018 (EST.) 2019 (LPL EST.)
consumers are supported by full employment increases in federal spending may continue to
U.S. 2.2% 2.9% 2.5–2.75% and improving wages; as a result, we expect play a meaningful role in 2019.
Developed ex-U.S. 2.4% 2.1% 1.9% the bulk of recent consumer spending patterns Inflation concerns may surface at times, and
FISCAL STIMULUS DID ITS JOB IN 2018, Emerging Markets 4.7% 4.7% 4.7% to persist, and that consumers will continue to we’ll be watching wage growth. It’s hard to
with the U.S. economy growing at an average provide a solid foundation for economic growth. have a sustainable inflationary threat without
Global 3.7% 3.7% 3.7%
of 3.3% over the first three quarters, compared Fiscal incentives for business spending help the participation of wages. Historically, wages
with the expansion average of 2.3% GDP U.S. ECONOMIC DATA lay the foundation for improved productivity, have needed to rise in excess of 4.0% annually
growth. While we believe expectations should Inflation (YoY%) 2.1% 2.4% 2.25 – 2.5% which will be important in 2019, as rising output before the Fed has felt the need to raise rates
be lowered in 2019, we continue to expect per worker helps offset inflationary pressures. aggressively. With wage growth trending near
Unemployment 4.4% 3.7% 3.6%
that the ongoing impact of fiscal stimulus will Although we expect current consumer spending 3.0% annually, we believe there is still plenty of
be readily apparent. We are looking for GDP Source: LPL Research, Bloomberg, International Monetary Fund (IMF) 11/30/18; 2018 GDP patterns to persist, job growth may start to time before inflation contributes to the end of
growth of 2.5–2.75% in 2019, supported by based on IMF estimates; 2018 inflation and unemployment based on Bloomberg-surveyed moderate, so the burden for boosting GDP will this cycle.
economist consensus given year-to-date data; 2019 economic data and U.S. and global
consumer spending, business investment, and GDP estimates are LPL Research forecasts. Other GDP estimates are IMF projections. fall on higher business investment, which leads Consequently, we look for the increase in
government spending [Figure 3]. Inflation is measured by the Consumer Price Index. to greater productivity. the Consumer Price Index to hover within the
9 • OUTLOOK 2019 *Per the Institute for Supply Management manufacturing Purchasing Managers’ Index
range of 2.25–2.50% in 2019. Stable prices at
this level should not alarm the Fed, which is
Japan continues to benefit from a strong
combination of fiscal and monetary policy
HOW TO INVEST
The global expansion continues but
What’s the
Alternative?
why we expect monetary policy to continue on initiatives, including government spending and may be slowing. The U.S. likely remains
We look at two alternative investment
its gradual path of rate increases. If we were to an accommodative monetary policy stance from a leader among developed economies,
strategies you can implement in a diversified
see runaway inflation, that is when we might the Bank of Japan. Yet structural reforms have while emerging markets have upside.
2
portfolio and their distinct purposes: long/short
expect more aggressive rate hikes, which can proved elusive and another increase in the value equity and event-driven strategies.
slow down the economy much more and create added tax (VAT) is on tap for October 2019. As a
the potential for a shock. result, the economic growth trajectory for Japan
U.S. GROWTH ...but is likely to slow. Rates still expected LONG/SHORT EQUITY
may peak by midyear. REMAINS ABOVE to rise at a moderate pace.
We maintain a positive equity outlook for 2019,
Taking a World View EM economies continue to perform relatively TREND... and therefore we think long/short equity can be
ECONOMY
well, despite concerns around trade, currency
an attractive option for participating in broader
We look for the global economy, measured by weakness amid dollar strength, and moderating POLITICAL ...but growth may stabilize. Political uncertainty
market gains while also helping to provide an
GDP, to expand at a healthy rate of about 3.7% demand from Europe and China. CONCERNS PERSIST is delaying structural reforms needed to
As the world’s second-largest economy, China IN EUROPE... make environment more business friendly. additional layer of downside risk management.
in 2019, led by growth in the U.S. and emerging
is always a major factor in EM growth. China’s
Long/short equity can be used to complement
markets (EM), while developed markets in
growth has slowed recently, in part due to the JAPAN FACES ...from slower Chinese growth and an expected traditional long-only equity exposure, especially
Europe and Japan may continue to lag.
We expect Europe to wrestle with some uncertainties surrounding the tariff disputes HEADWINDS... tax increase. Improving opportunity but 2019 when picking stocks based on their potential
may present challenges. to generate returns. A potential decrease in
of the biggest policy issues for developed with the U.S. If growth does not stabilize, we
expect Chinese officials to launch a variety of
correlation—the degree to which stocks move
markets this year. A tighter regulatory
EMERGING ...but China likely to slow. China and trade together—plus greater levels of return dispersion
environment and labor laws that restrict programs to offer support, including funds for
MARKETS ARE risk remain in focus but diverse space may (uncertainty and risk) may support a more
business growth remain structural concerns, lending, government spending on infrastructure, GROWTH LEADERS... present opportunities.
and possibly lower corporate tax rates to
favorable stock-picking environment. We continue
but there are also several more immediate
incentivize investment.
to favor strategies with a conservative or variable
issues that may weigh on growth, including
In the coming year, we think it will prove
net exposure that may help add risk control, as
Brexit, Italian budget concerns, and a rise
important to distinguish between emerging
well as some exposure to a broad set of global
in populism. Considering these issues, we
Asia, emerging Europe, and Latin America. In
markets to provide more robust opportunity.
suspect Europe may have difficulty exceeding
2.0% GDP growth in 2019. emerging Asia, we remain encouraged by solid EVENT-DRIVEN STRATEGIES
Investors looking for a risk-return profile similar
GDP growth prospects, despite slower demand to a fixed income portfolio but without the interest
from China. Currency risks persist in Argentina rate and credit sensitivity may consider event-
THE RELATIONSHIP BETWEEN When the economy heats up, inflation
starts to rise: Businesses want to put
and Turkey, causing those nations with current
account deficits to weigh more broadly on their
driven investing. This strategy benefits from a
competitive corporate-deal environment, and
INFLATION
people to work, labor gets scarcer, wages regions. Emerging Europe has weak growth tax reform may continue to support the industry
increase, and there’s more demand for prospects, but Latin America, despite Argentina for the medium term. Historically, event-driven
goods and services. So prices go up. and Venezuela, is likely to experience improved strategies have maintained extremely low equity-
As inflation rises, the Fed steps in and
& THE FED’S
momentum coming from Brazil and Mexico. like exposure, which has resulted in returns
raises rates. This is an effort to decrease Emerging markets is a deceptive term, since more dependent on idiosyncratic deal flow
borrowing and encourage saving. That different emerging market regions have widely rather than the broader market direction. The
slows down the economy. divergent economic drivers. Therefore, we ongoing U.S.-China trade dispute and regulatory
POLICY RATE If that happens too quickly, and
inflation gets too high before the Fed
steps in, then policymakers may react too
aggressively, making a policy mistake.
look to distinguish opportunities in different
emerging markets, viewing in order of
preference emerging Asia, Latin America,
and then emerging Europe.
uncertainty represent additional risks; however,
we believe skilled managers can add value in
navigating these uncertainties.
That can slow the economy down so
much that it triggers a recession.
Right now, the Fed is keeping it Chapter Summary
gradual, helping keep inflation near the We do not anticipate a recession in 2019,
target for price stability as part of its dual thanks to the fundamentally driven economic
mandate (along with full employment). momentum, combined with fiscal incentives
The Fed wants to let the economy and government spending programs on tap for
become as strong as it can without doing the coming year. But given the length of the
damage down the road. This is a delicate
balancing act.
OUTLOOK 2019 • 12?
current expansion and where we are in the has expanded, and occasionally contracted
economic cycle, it is natural that investors during periods of recession. This has resulted in a
are looking for the signs of a recession on trajectory that has included peaks and valleys—
the horizon. a few higher or deeper than others—but that
There are some late cycle indicators that over the long term, has advanced.
2
we’re seeing now: Inflation and wages But what about those bear markets (declines
are picking up and the Fed is in tightening W H AT I F. . . of 20% or more) and less extreme but still
mode (raising rates). Housing and auto sales meaningful corrections (declines of 10% or
have weakened, but personal consumption, more)? Bear markets and even corrections do
business investment, and government cause real economic damage, but should also be
THE RISK OF
A Snapshot
ECONOMY
spending remain solid and have not yet viewed in relation to the history around them and
RECESSION RISES?
moderated to levels that would raise concerns. the long-term performance of the market. Past
At the same time, we have this large fiscal recessions accompanied by bear markets have
stimulus that’s very supportive for economic
growth. There’s never been a time when the
U.S. had this much stimulus this late in the
There are a few scenarios that
could indicate a recession may of Stock certainly felt worse than they look here, but that’s
the point—sometimes our emotional reactions
to market changes overwhelm the broader
Market
come sooner than we expect:
cycle and then went into a recession. So far, perspective a longer-term view can provide.
all the indicators are showing that the economy
Wages rise sharply
Be Calm & Prepared
History
has been responding well to the stimulus
(through the first three quarters of 2018) and Inflationary pressures increase
We believe we’re in the later stages of the market
we should see more of those effects ahead Fed becomes more aggressive cycle, which can last several years, but we’re
because it typically takes more time for these
Consumer spending cools watching all the indicators to make sure we’re
structural forces to really come into play. This
prepared for the next transition. To help you keep
first push we’ve seen already is likely due to
the confidence in these initiatives.
Business spending stalls
Trade rhetoric escalates
Bulls & Bears perspective, here are a few things to remember
about bear markets, corrections, and recessions:
In addition, although we are late in the Market returns can be looked at from a lot of
economic cycle, that period can last for a long Leading indicators weaken different levels: intraday moves, daily changes Bear markets start as market corrections, but
time and these late stages can be positive significantly that bring new highs and lows, and the longer- about 70% of the corrections since 1950 did
for investors. We’re not seeing the excesses term trends—the bears and the bulls—that not go on to become bear markets.
or “red flags” that would normally put us on Although we don’t expect these define broad market movements.
70% of the bear markets since 1950 have
watch; at the same time, we are carefully conditions, it’s prudent for As we follow the market’s twists and turns,
been associated with recessions. When this
watching for the signs that could precipitate investors to be on the lookout. it’s important to know what these movements
has happened, the start of the bear market
those red flags eventually, such as heavy mean today, as well as how they’ve played
has preceded the onset of the recession by
overborrowing accompanied by overspending, out over time. What does the history of
several months.
so we do need to be more aware at this stage. stock market returns look like? What kind of
And of course, it’s always important to be perspective does it provide? And how might Bear markets associated with recessions
mindful of where we are in the cycle, so that that influence how we feel as we experience typically bottom in the heart of the recession,
we can be prepared for the next transition. market advances and declines from day to day? which means the market begins its upturn
while the recession is still going on.
Look Inside!
We’re on the lookout, Open this page to take a look at the history of
the S&P 500 Index since 1950. The blue graph
Eventually, this cycle will transition to the
next. On a total return basis, the S&P 500 has
taken an average of a little less than 1.5 years to
but not yet seeing red represents the index’s total return, including
both price changes and dividends. Historically,
there’s been a long-term pattern of market gains,
recover from a bear market. And that’s one of the
main reasons to consider staying invested in the
market—even during downturns—to attempt to
flags that could indicate and in fact even very volatile periods appear less
dramatic at this scale. This pattern is not just
magic—it’s had a firm basis. Stocks ultimately
regain the value of your portfolio as the market
moves from a bear market to its expansion phase.
Keeping a focus on the market as a whole
an impending recession.
represent ownership of a small slice of corporate and being prepared are fundamental for
profits, and corporate America has been able to riding out eventual downturns and reaching
grow its profits over the years as the economy long-term investment goals.
13 • OUTLOOK 2019 OPEN HERE! OUTLOOK 2019 • 14100,000
A SNAPSHOT OF STOCK MARKET HISTORY
The S&P 500 has
3.1
4.0
taken an average
of a little less than
10,000
It may have
0.3 taken three
1.5 years to recover
1.4 years to recover
from the 2008
bear market,
from a bear market.
one of the
longest periods
to recover
0.2 shown in this
chart, but those
1,000 who abandoned
1.8 the stock
0.8 market missed
out on about a
0.5 300% rally since
this bull began
0.8 in March 2009.*
0.7
100
LEGEND S&P 500 daily returns (measured on a logarithmic scale)
Market peak to loss recaptured
O Time from market low to recapture of prior peak (years)
Recessions
Bear markets
10% market correction
10
1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
*As of November 30, 2018, the S&P 500 is up 308% cumulatively since March 9, 2009.Yield Curve May Stay Flat
fig.5 Due to Higher Trending Rates
2-10 YEAR TREASURY YIELD SPREAD 10 YEAR TREASURY YIELD
3
10%
chapter 3: YIELD CURVE IS
CONSIDERED FLAT
WHEN 2-10 YEAR
Manage
SPREAD IS NEAR 0.
5%
BONDS
Expectations
for Bonds
0%
‘90 ‘92 ‘94 ‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18
Source: LPL Research, Federal Reserve 11/30/18; the yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but
differing maturity dates. The yield spread is the difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another.
positioning should still be somewhat insulated
against rising rates, in our view, but investment-
grade bonds look more attractive than they have
LET’S
in years, and they can continue to play a role in a
well-diversified portfolio.
RECAP
Reading the Yield Curve
Investors’ obsession with the flattening U.S.
Treasury yield curve dominated headlines for
much of 2018. A flattening yield curve occurs
when short-term rates are rising faster than
long-term rates, which may eventually lead to an
inverted yield curve, where short-term rates are
higher than long-term rates. Historically, this has
been a negative signal for the U.S. economy,
IT’S BEEN A CHALLENGING ENVIRONMENT often providing an early warning of an eventual
for bond investors over the last several years, and recession, which is why the yield curve has
it all comes down to interest rates—in terms of been garnering so much attention recently. The yield on the benchmark 10-year U.S. Treasury jumped
rates both staying low and rising. Low rates have We believe these concerns were overstated roughly 60 basis points (0.60%) in 2018 (as of 11/30) from
meant less income from fixed income securities, given the positive economic environment. 2.40% to 3% [Figure 6, p.19]. Market interest rates moved
while rising rates pushed bond prices down, We do expect both short- and long-term rates higher as economic growth gained traction and inflation
lowering the value of the securities. to gradually rise in 2019, keeping the yield measures approached the Fed’s target for price stability.
While both low and rising interest rates will still curve somewhat flat [Figure 5]. However, if The rising federal budget deficit also caused Treasury
be in play in 2019, we believe the worst is likely that continues to occur in the context of solid auction bidders to demand higher yields for the risk they
over. The somewhat higher interest rates we have economic growth and modest inflation, we were taking, particularly since the Fed, with the end of QE,
now come with higher bond income; and although don’t think a flat yield curve should be read was no longer backstopping the U.S. Treasury market. While
we are still concerned about rising rates, we think as a signal of rising recession risk. rising rates are a signal of good economic growth, they can
that upward pressure will moderate compared to Understanding what’s driving short-term cause volatility, especially when rates periodically surge.
what we’ve seen since mid-2016. Fixed income rates higher provides further valuable context
OUTLOOK 2019 • 16to the yield curve. Changes in short-term
rates largely reflect Fed policy, and in 2018,
HOW TO INVEST
We expect interest rates to continue
valuations relative to other global sovereigns,
the benchmark U.S. Treasury above a 3.0% rate Digging
Deep
short-term rates moved higher in anticipation to rise at a moderate pace in 2019, often has experienced good demand when
of gradual rate hikes. We expect the Fed to but more slowly than in recent years. compared to other, more expensive developed
raise rates only twice in 2019, roughly in line Higher-quality bonds have become market alternatives.
3
with the consensus and the Fed’s updated more attractive as rates rise, but we still Against this backdrop, we expect near Commodities may remain volatile
emphasize above-benchmark credit risk and are unlikely to be attractive
December guidance. flat returns for the Bloomberg Barclays U.S.
and below-benchmark rate sensitivity. unless an upside inflation surprise
Market forces may create conditions that Aggregate Bond Index. Although we do
acts as a catalyst for hard assets.
enable the Fed to pause and reassess the recommend generally moving closer to the
rate hike path that best serves the economy. benchmark given the potential for later cycle
BONDS
These forces include the lack of threatening volatility, we continue to position portfolios with Oil prices are likely to remain volatile
wage pressures, delayed effects of previous INVESTMENT-GRADE Economic growth may help credit-sensitive bonds; below-benchmark interest rate sensitivity in 2019, mainly because technological
POSITIVE
hikes, policymakers’ awareness of the CORPORATE BONDS added credit risk provides incremental yield. and above-benchmark credit risk to help innovations continue to make it challenging
impacts of dollar strength, the impact of manage rising rates while positioning for for markets to find a stable price range.
balance sheet reduction, and the increase in MORTGAGE-BACKED Yield benefit relative to rate risk remains
continued economic growth. We believe West Texas crude (WTI) is still
Treasury issuance (driven by deficit spending).
SECURITIES attractive among high-quality options.
a fair value in the $60-per-barrel range,
We are encouraged by the Fed’s recent
emphasis on flexibility, which will allow it to
INTERMEDIATE-TERM Offer some potential diversification while Picking a Position and we anticipate some pickup in demand
in 2019. Geopolitical risk potentially could
HIGH-QUALITY BONDS avoiding the rate risk of long-term bonds. Given our expectations of rising interest rates,
be more responsive to market conditions. provide some support for prices.
yet at a slower pace than in recent years, here
NEUTRAL
BANK LOANS Still potentially attractive for strategic At current price levels, we think gold can
is a breakdown of how bond sectors may
Breaking It Down investors, but high issuance, weaker investor
protections raise some concerns.
perform in 2019.
play a role as a hedge against inflation or
a sharp rise in economic uncertainty, but
Taking all of these factors into account, we U.S. TREASURIES: U.S. Treasuries do have high right now we don’t see either of those as
anticipate gradually increasing interest rates HIGH-YIELD May be supported by further economic growth, interest rate sensitivity, meaning that a sharp looming factors. In addition, more attractive
as U.S. economic growth moderates from BONDS but we prefer a combination of equities and rise in rates could have a large and negative yields from other investments increase the
high-quality bonds. opportunity cost of holding gold, and the
the strong pace of 2018. Consequently, we impact on total return. However, we believe
expect the 10-year Treasury yield to eventually it is important not to fully abandon this fixed potential for the dollar to at least hold at
trade within a range of 3.25–3.75% in 2019.
DEVELOPED Valuations remain very rich and declining
income sector, because U.S. Treasuries can help its current levels removes some support for
INTERNATIONAL central bank accommodation may create a
NEGATIVE
We may periodically see spikes above or provide portfolios with diversification, income, going for the gold.
BONDS challenging environment.
drops below, but we suspect the bulk of time and liquidity, and can help smooth out volatility Industrial metals may benefit
will be spent within this range, as domestic LONG-TERM HIGH- With rates still expected to rise, diversification during periods of equity market stress. from fiscal efforts to spur
and global investors attempt to find balance QUALITY BONDS benefit does not adequately compensate for growth; however, demand from
MUNIS: Despite 2017 tax cuts potentially China could continue to diminish
among Fed guidance, U.S. Treasury issuance, added rate sensitivity.
weighing on demand, municipal securities
wage pressures, and relative valuations with as its economy transitions from
other sovereign bonds. manufacturing toward services
Tying back to the yield curve, the demand and consumption. With global
for U.S. Treasuries also points to the yield growth unlikely to accelerate,
curve remaining flat. Because of its attractive upside may be limited.
We expect the 10-year
?
RATES MOVE Stronger than expected
economic growth
If we see rapidly
rising rates, bond
Treasury to spend the SHARPLY
performance will
A tightening job market likely suffer and
borrowing costs
HIGHER? Competition for labor pushing
bulk of 2019 in the
would increase,
up wages significantly
creating a challenge
Several factors could Companies raising prices to for consumers and
indicate that interest rates businesses. We may
range of 3.25–3.75%.
offset tariff costs
W H AT I F. . . may experience a sharper also see heightened
Rising inflation expectations
increase than expected: stock market volatility.
17 • OUTLOOK 2019 OUTLOOK 2019 • 18Although Rates Are Climbing,
fig.6 Increases Have Been Gradual chapter 4:
Believe
10 YEAR TREASURY YIELD
3.5%
3 4
3%
in the Stock
2.5%
2%
Market’s
1.5%
BONDS
STOCKS
1% CHANGE CHANGE CHANGE CHANGE
.5% 0.10 0.18 -0.05 0.61
0%
2015 2016 2017 2018
Source: LPL Research, Federal Reserve 11/30/18 Potential
performed better than we anticipated. We still rates. We still prefer bank loans to high yield, but
view tax-exempt fixed income as relatively given our bias toward quality, we recommend
attractive for suitable investors. only marginal exposure for suitable investors.
MBS: Mortgage-backed securities (MBS) have INTERNATIONAL: Developed market sovereign
a history of strong performance during periods bonds continue to look expensive to us. Central
of rising rates as prepayment risk diminishes. bank policy has made yields unattractive and
Mortgage supply has been weaker than expected rising rates may become an additional challenge
in 2018, while the period of slow curve flattening as the European Central Bank reduces its
helped minimize volatility in the space. Despite monthly asset purchase program. Emerging
expectations that rising rates will moderate, market debt (EMD), denominated in dollars,
we believe adding MBS over the coming year looks attractive when considered through the
may help provide added diversification. lens of relative valuation. EMD spreads are
HIGH YIELD & INVESTMENT-GRADE: As we
currently at a slight premium to high yield,
compared to history, and appear poised to
Tracking This Bull
move into the later part of the business cycle, The current bull market is officially the longest
rally in the coming quarters.
we are increasing our focus on investment-grade in history, and the economic expansion is
(IG) fixed income, with a modest allocation quickly approaching that milestone as well—it’ll
to high yield only for strategically oriented
investors. High yield historically provides extra
Chapter Summary be the longest expansion ever as of May 2019
[Figure 7]. So what does age have to do with
While the 37-year-old bull market in bonds may
return for the greater risk it carries and typically it? Considering that on average the typical bull
be over, we’re not convinced a full-on bear
outperforms during periods of rising rates; market and expansion last approximately 5
market has begun. The income-generation
however, we believe IG corporates may provide CONSIDERING OUR VIEWS ON ECONOMIC years, reaching the 10-year mark is quite a feat.
(coupon clipping) phase of the credit cycle may
some of the potential benefits of the added growth, monetary policy, and the fiscal tailwinds But for those who are concerned that the cycle
last longer than in previous experiences, given
credit exposure while avoiding some of the of government spending, reduced regulation, has gone on too long, there is some interesting
the extent of monetary policy accommodation
risk of high yield. Up to half of the sector now and lower taxes, we expect 2019 to be a good context to consider. Assuming the start of
over the past decade. Nonetheless, we
carries a rating of BBB—essentially one notch year for stocks. Market volatility will likely the current bull market began after the lows
acknowledge that it will prove more difficult to
away from being categorized as high yield. persist, as investors digest the many forces achieved in March 2009, then it is the longest in
make money in bonds going forward, as a variety
As a result, IG bonds may offer the potential impacting the economy, interest rates, and duration, but not magnitude.
of trends conspire to push market interest rates
to exceed their average performance during corporate profits. We also believe that during While the current bull market has exceeded
higher. Therefore, for diversified fixed income
previous periods of rising market interest rates. volatile periods, investors must focus on the the 10-year life of the 1990s bull, that period
portfolios, we will try to employ active strategies
fundamentals supporting earnings, interest generated returns in excess of 400%, compared
BANK LOANS: Bank loans carry below to identify fixed income investments that may
rates, valuations, and income, and remember to the current more than 300% return. Yet in
investment-grade credit risk but have been a perform better in an environment of rising rates,
the importance of diversification. late summer and early fall of 2011, the S&P 500
popular choice to insulate portfolios against rising dollar strength, and fiscal stimulus.
19 • OUTLOOK 2019Index fell by 19.9%. Some could suggest we’re
splitting hairs here, but it sure felt like a bear
In reality, we can’t say for sure how long
this bull will keep running, but given the
HOW TO INVEST
Our expectations for equity market leadership in 2019 are based on our forecast
for solid but slightly slower growth in the U.S. and global economies and
market! Another factor to consider is that stock fundamentals of the U.S. economy and corporate profits, tighter monetary policy, and a gradual rise in interest rates.
prices, as measured by the S&P 500, did not corporate America, we believe the odds
4
make new highs again until 2013, which would favor solid potential gains for stocks next year.
indicate the current bull is not nearly as old as
originally thought.
Though volatility is a characteristic of a late
Breaking It Down CYCLICAL Favor cyclical sectors over defensives as the economic expansion is likely to continue through
cycle stock market environment, in our opinion, After watching tax reform boost S&P 500 STOCKS 2019. Industrials are poised to benefit from resolution of the U.S.- China trade dispute, technology
may continue to deliver strong earnings growth, and financials appear attractively valued.
STOCKS
corporate profitability is the most important operating profit growth to over 20% in 2018,
POSITIVE
determinant of equity prices, followed by interest we believe the pace of earnings gains will
VALUE Value may benefit from solid U.S. economic growth and relatively attractive valuations
rates. Though profits rose by approximately 25% moderate in 2019 to 6–7%, essentially in line after a sustained period of growth outperformance.
in the first three quarters of 2018, and growth with historical averages. This would bring index
of more than 20% is expected for the full year profits to $172.50 in 2019, up from roughly EMERGING Emerging markets may benefit from solid economic growth, favorable demographics, attractive
based on FactSet consensus estimates, concerns $162 per share that we expect for 2018. These MARKETS valuations, and prospects for a U.S. trade agreement with China.
have escalated that profits have peaked. Investors estimates could prove conservative depending
must make the distinction that, while the rate on clarity on trade and the path of interest rates U.S. STOCKS Fundamentals are positive for U.S. stocks amid a solid economic and corporate profit backdrop.
of growth in profits may have peaked, absolute and commodities prices. Suitable investors may consider dedicating the majority of equity allocations to the U.S.
profits remain at record levels and are expected Given our belief that the Fed will raise
U.S. DEFENSIVE Defensive sectors are likely to lag their more cyclical counterparts as the economic expansion
to rise. Also, a look back at the past 10 profit rates more slowly in 2019, with the economy
STOCKS and bull market continue, potentially pushing interest rates higher.
cycles reveals that after a peak in the year-over- expected to generate 2.25–2.5% inflation,
NEGATIVE
year profit growth rates, it has taken about four we believe a price-to-earnings ratio (PE) for
GROWTH After a sustained period of strong performance compared with value, the growth stock
years before the economy slipped into recession. the S&P 500 of 17.5 times trailing earnings is rally may be due for a pause. We favor the biggest value sector, financials, over the biggest
Perhaps more important, equity prices climbed appropriate. Thus, we believe the S&P 500 growth sector, technology.
by an average of more than 50% during that
intermediate period. Clearly, peak profit growth DEVELOPED Growth in Europe has been slowing and may not reach 2% in 2019, while political uncertainty
does not indicate the cycle is nearing its end. INTERNATIONAL is high. Growth in Japan is also slowing despite stimulus and corporate reform efforts.
Economic Expansions
fig.7 & Bull Markets
CURRENT LENGTH OF ECONOMIC EXPANSIONS LENGTH OF BULL MARKETS
SINCE WWII (MONTHS) SINCE WWII (MONTHS)
120
110
100
90
LET’S RECAP
80 In our Outlook 2018 publication, we discussed the possibility of increased volatility ahead.
70
To be sure, market volatility escalated in early February, after a strong start to the year, as
monthly wage growth climbed higher than expected. Market interest rates jumped and
60
equity prices dropped, experiencing their first correction (a 10% fall from the market’s
50
previous high). Stocks and rates tried to stabilize for several weeks before tariff concerns
40 escalated, and stocks again dropped about 10% in late March through early April.
30 An essentially flat market persisted throughout the second quarter. In early summer,
20 the U.S. administration began to make progress on trade, which reassured investors, and
10 the S&P 500 Index jumped more than 7% in the third quarter. Tariff concerns with China
remained, however, and stocks experienced further volatility in the final months of the year,
OCT OCT MAY APR FEB NOV MAR JUL NOV MAR NOV JUN JUN OCT JUN OCT MAY OCT AUG DEC OCT OCT MAR as trade issues weighed on investor sentiment and Fed officials reiterated plans for gradual
‘45 ‘49 ‘54 ‘58 ‘61 ‘70 ‘75 ‘80 ‘82 ‘91 ‘01 ‘09 ‘49 ‘57 ‘62 ‘66 ‘70 ‘74 ‘82 ‘87 ‘90 ‘02 ‘09
rate increases following their December rate hike.
Source: LPL Research, NBER, FactSet 11/30/18; economic expansions are based on GDP growth, bull markets on S&P 500 returns.
21 • OUTLOOK 2019 OUTLOOK 2019 • 22U.S. & Emerging Markets
?
fig.8
would be fairly valued in the range of 3,000 supported by fiscal stimulus. We believe
over the coming year, representing an 8–10% financials are attractively valued and remain well
return from levels heading into December
(2760 as of 11/30/18).
positioned to benefit from steady economic
growth and deregulation efforts. Finally, we
Lead Earnings Growth
EARNINGS GROWTH U.S. DEVELOPED INT’L EMERGING MARKETS
expect technology to continue to deliver strong
4
30%
Picking a Position earnings growth and enable productivity gains
for corporate America.
Against a backdrop of steady economic growth, EMERGING VS. DEVELOPED MARKETS: We
strong corporate profits, and a rising rate favor EM equities over developed international 20%
environment, here is a high-level look at our views W H AT I F. . .
equities for their solid economic growth
STOCKS
when it comes to positioning for 2019. trajectory, favorable demographics, attractive
LARGE VS. SMALL CAPS: Small caps generated valuations, and prospects for a U.S. trade
outperformance early in 2018, aided by being agreement with China, with a bias toward
emerging Asia. Growth in Europe has been
10%
STOCKS
STUMBLE?
relatively more insulated from trade tensions
than large caps. However, as trade issues slowing and may struggle to reach even 2%
mitigate, the business cycle ages, and the in 2019, while growth in Japan is also lagging,
despite stimulus and corporate reform efforts. 0% Although we expect corporate
dollar’s uptrend potentially hits resistance,
profits and a steady economy
market leadership may shift back toward GDP growth in China and broader EM may more
to support stocks in 2019, there
large caps. In addition, a rising interest rate than double the pace of developed international
are a few potential scenarios
environment, potentially with tightening financial economies in 2019, supporting better earnings
to watch for:
growth, and we believe political uncertainty is -10%
conditions, may create a challenge for small cap
companies that have higher costs of capital and actually lower in EM than in Europe [Figure 8]. Margin pressure increases
a greater reliance on debt. Accordingly, over sharply, hurting profits
the next several months, we suggest suitable
investors shift toward target allocations across
Chapter Summary -20%
‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18E ‘19E
Trade risk escalates
market capitalization with benchmark-like Overall, we do expect that 2019 may be a good Global economy slows
Source: LPL Research, FactSet 11/30/18; indexes: S&P 500 (U.S.), MSCI EAFE (developed
exposures to small, mid, and large cap stocks. year for stocks, with the potential for 8–10% more than expected
international), MSCI EM (emerging markets). Estimates may not develop as predicted.
returns for the S&P 500. Like 2018, however, Business and consumer
GROWTH VS. VALUE: We maintain our
we expect volatility to remain as the business spending slow significantly
slight preference for value despite its
cycle ages. We recommend investors weather
underperformance relative to growth in 2018.
these ups and downs by focusing on the Should these circumstances
We expect value in 2019 to benefit from the
fundamentals and diversifying portfolios where arise, stocks could be negatively
pickup in economic growth that began in mid-
appropriate. We believe stocks may find support impacted. It is during these
2018, relatively attractive valuations after a
from continued steady growth in the U.S. challenging times when we
sustained period of growth outperformance,
The Dollar
economy and corporate profits as the impacts have to be mindful that we
and our positive view of financials. don’t react emotionally and
of fiscal stimulus continue to flow through. We
SECTORS: We favor cyclical sectors over will continue to look for any signs of weaker sell stocks when they’ve hit
defensives, specifically cyclical value, as we
expect the economic expansion to continue
through 2019. Industrials are poised to benefit
economic or profit growth that could drag stock
prices lower. Potential escalation in U.S.-China
trade tensions, including more and higher
Winds Down
Given our thoughts on monetary policy for 2019, we
a bottom.
Diversified portfolios may
help navigate these challenging
environments. Asset classes
from resolution of the U.S.-China trade dispute tariffs, remains a key risk to corporate profits believe the bulk of the dollar’s advance is behind us.
We are less sanguine on the dollar longer term given that may provide diversification
and a potential pickup in capital spending, and therefore global stock markets in 2019. benefits during a challenging
structural forces such as federal deficit spending.
period, such as high-quality
bonds, defensive equity sectors,
Although volatility will Given our thoughts on monetary policy for 2019, extended dollar positioning by institutional traders,
and uncertainty about trade, we believe the bulk of the dollar’s advance is behind us. To the degree
and alternative strategies often
look very unattractive when
persist, we expect 2019
markets are rising. Position
that U.S. economic growth exceeds forecasts and global policy remains largely accommodative,
for the expected environment,
modest upside is possible in the coming year. As a result, the dollar may not provide much support to but realize you don’t need
those asset classes that benefit from its decline, nor do we expect any potential dollar advance over
may be a good year for stocks.
everything in a portfolio all the
the full year will be much of a headwind for dollar-sensitive assets. Longer term, our position is less time. Diversification still matters.
sanguine for the greenback given federal deficit spending and structural trade imbalances.
23 • OUTLOOK 2019 OUTLOOK 2019 • 24You can also read
