Investment Insights: Excerpts from our 2019 outlook

Wade Balliet
Posted by Wade Balliet
Investment Strategy

The following are excerpts from the Investment Insights 2019 Outlook report, produced by our Global Investment Management team.

The End of an Era

There is greater uncertainty heading into 2019 than in many previous years.

Volatility and uncertainty go hand in hand, and this will be a central theme for financial markets as investors weigh economic fundamentals against ongoing monetary policy shifts and geopolitical events worldwide.

Forecasted Themes for 2019

• The U.S. economy is further along in the business cycle than Europe and other parts of the world. Issues such as the U.S.-China trade war and Brexit haven’t changed the picture of a continued slowing in global growth. China, although positively contributing to global GDP, will continue to see its economy stumble.

• Monetary policy across the globe is the largest contributing factor to ongoing uncertainty due to a diversion between market expectations and the Federal Reserve’s projections for rates. Our baseline forecast is for one hike in 2019. However, that prediction is highly dependent on economic data, particularly the long-awaited pickup in inflation, and relative stability in the financial markets.

• The risk of recession in 2019 remains fairly low, though we continue to see an increased probability of one in 2020. Lower economic growth without a recession is the most likely scenario for 2019. However, the market will not wait for an actual call and instead see fear-based trading throughout the year.

• Our strategy for 2019 is to be tactical, and to break the year into segments. The U.S. stock market has the opportunity for gains throughout the year, and especially in the first half if the ebb in monetary policy becomes more optimistic, or if the trade war sees a resolution. Strong single-digit earnings growth, stable valuation ratios, and positive fundamentals should give U.S. markets positive total returns in 2019.

• International markets are dealing with more uncertainty than the United States. Between Brexit, Italian populist movements, a monetary policy shift in Europe, slowing demand in China, and a cratering of oil prices for OPEC countries, equity markets face either a year of great success or one in the doldrums. We think it could be a close race between developed countries, developing countries, and the U.S., and it will all depend on which one is able to shed the most risk.

• Prudence in the bond markets is also warranted. Given the relative strength of U.S. growth, an expansionary fiscal policy, the Fed’s move into more restrictive territory, and the current inversion in short-term Treasuries, U.S. bond yields will likely move structurally higher. In the absence of major financial market events, we foresee a continued rise in longer-term yields with the 10-year Treasury approaching 3.25% toward the end of the year. More volatility and lower returns compared to some previous years may be on the horizon.

• An increased correlation between stocks and bonds compared to long-term averages has placed greater importance on alternative assets as a hedge and diversifier. Outside of commodities, certain real assets and absolute return strategies will likely be beneficial instruments as volatility continues, or if a sell-off in equity markets occurs. We believe that oil will move higher and end the year above $65 per barrel as supply is taken off the market and demand continues to be strong.

• Global equities should outperform fixed income if political and monetary resolutions come to pass. Brexit and the U.S.-China trade truce have hard deadlines in the first quarter of 2019. Brexit remains worrisome given the time remaining on the clock and the lack of a clear-cut path to an agreement. However, without a recession, with valuations reset across the board, and the likelihood of a slower paced rate trajectory, we feel good with an overweight to equities.

Read the full outlook report for 2019.

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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