2019 is fast approaching, here are five economic and market predictions that will influence investor returns in the new year.

  • Global Growth To Slow: However the impact on U.S. equities will be somewhat offset by a less hawkish Federal Reserve and a slowing pace of rate hikes.
  • The tale of two yield curves: A lot is being said about the flattening yield curve, but the Fed is more focused on the short end (4-week to 52- week) of the curve, which remains steep.
  • Core inflation will continue to be modest in America: Wage growth remains tepid. Stock market volatility will persist, albeit much less so than in late 2018.
  • Investors should expect significant performance divergence among the sectors of the S&P: Rate sensitive sectors such as utilities, consumer staples, communication services and financials will outperform their more cyclical counterparts.
  • Fixed-income markets should fare well next year: In particular intermediate term high quality bonds, as the ebbing of rate hikes and higher overall rates increase bonds’ attractiveness.


2019 is fast approaching, here are five economic and market predictions that will influence investor returns in the new year.

  • Global Growth To Slow: However the impact on U.S. equities will be somewhat offset by a less hawkish Federal Reserve and a slowing pace of rate hikes.
  • The tale of two yield curves: A lot is being said about the flattening yield curve, but the Fed is more focused on the short end (4-week to 52- week) of the curve, which remains steep.
  • Core inflation will continue to be modest in America: Wage growth remains tepid. Stock market volatility will persist, albeit much less so than in late 2018.
  • Investors should expect significant performance divergence among the sectors of the S&P: Rate sensitive sectors such as utilities, consumer staples, communication services and financials will outperform their more cyclical counterparts.
  • Fixed-income markets should fare well next year: In particular intermediate term high quality bonds, as the ebbing of rate hikes and higher overall rates increase bonds’ attractiveness.

Growth Expectations for 2019:

Based on a review of forecasts by ten of the world’s largest investment firms, the average forecast for global growth is as follows: In real terms (real GDP) the U.S. economy is expected to grow by 1.75% in 2019, with core inflation averaging near the Fed’s target rate of 2%. European growth will be somewhat lower averaging slightly below 1.25% in real terms, while Chinese real GDP growth is expected to be 5%.

Although there is a slight risk of a recession for the U.S. economy in 2019, the odds remain against it. Nonetheless, there is a rising risk that major Money Center Banks and the Federal Reserve are underestimating the impact of a strong U.S. dollar, higher borrowing costs, the Fed’s deleveraging of its balance sheet and the impact of tariffs on corporate profits and consumer behavior.

The more things change, the more things stay the same:

As the Fed moves from quantitative easing (QE) to quantitative tightening (QT), investors will continue to recalibrate their asset class return expectations. As a result of this, major U.S. stock indexes in 2019 are likely to behave similarly to the way they have in this year, which was marked by a series of short-term upward bursts, followed by increased volatility and a slow selloff.

I expect U.S. stocks will provide a low single-digit return for investors. However, unlike 2018, as a result of slowing interest rate hikes, increased yields and a flattening yield curve, bonds will prove accretive to overall performance, as opposed to being a drag.

I expect the Shino-American trade war to last a while longer, as it appears to be as much about economics as it is about ideology–at least for the Chinese. However, while this will continue to be a drag on economic performance, it is unlikely to impact market volatility to the degree it did in 2018 as investors simply grow complacent on this matter.

Although the ongoing trade war with China will not cause the same levels of investor anxiety it has during this year, there will be plenty of things for investors to get excited about. Most significantly, I expect a greater slowing in economic growth than most project, as the impact of the Fed’s efforts to deleverage its balance sheet, rising borrowing costs and rising deficits collide to create a ‘perfect storm’ of sorts.

As such, it is possible that the Fed remains a touch too hawkish and that fiscal stimulus wanes sufficiently that a mid- to late-year recession is in the cards. Should this occur, I believe it will be a shallow but prolonged recession, possibly lasting more than one year. However, I encourage investors to avoid falling into the trap of predicting the catalyst or timing of a downturn, as there are simply too many variables to accurately forecast this. Moreover, history has shown that both equities and fixed-income instruments can provide investors a positive return during such down-cycles.

Investment Takeaway:

U.S. Equities: The S&P 500 should rise slightly in 2019, perhaps as much as mid-single digits, all the while being subjected to bursts of sharp increases and periods of slow declines. More significantly, I anticipate material performance divergence among the sectors of the S&P and various segments of the market. Rate sensitive sectors such as consumer staples, financials and utilities, as well as the battered energy and health care sectors should outperform broad indexes. Moreover, I expect high-quality balance sheet companies’ stocks to outperform their less robust counterparts.

U.S. Fixed Income: High quality, intermediate-term bonds should perform well in 2019. Specifically, “A” rated 2- to 7-year corporate bonds, 5- to 10-year general obligation municipal bonds and short-term Treasurys to be accretive to overall performance, possibly matching the S&P 500’s risk adjusted return for the year.

Also, given that cash and money markets are now providing investors with a net real return, in increased allocation to this almost forgotten asset class could prove worthwhile, especially if stock volatility rises. And while high-yield and other distressed lending sectors should be fine, their risk outlook continues to worsen, making them a relatively speculative and unattractive investment at this stage.

International Equities: Although there are some very attractive valuation amongst large-cap European and Chinese equities, the global-macro headwinds these markets and economies face heading into the new year are causing me to be cautious and remain underinvested in these markets.

International Fixed Income: In short… Not so fixed. Emerging markets debt is likely going to struggle in 2019, while developed market debt (Europe, Australia and Japan) will likely underperform due to currency and geopolitical headwinds. As such, I view this asset class as speculative and remain underweight international debt.

 

This article was written by Oliver Pursche from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network. 

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Matthew A. Helfrich
Partner and President
Waldron Private Wealth
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