Investment Strategy Quarterly April 2019

Stay Focused, Because 2019 Is Breaking Economic Records

  • 04.01.19
  • Markets & Investing
  • Article

Growth, earnings and confidence suggest a favorable year, says CIO Larry Adam – “especially for investors maintaining a long-term time horizon.”

To read the full article from Chief Investment Officer Larry Adam, CFA, CFP®, CIMA®, see the Investment Strategy Quarterly publication linked below.

Despite numerous headwinds, 2019 is gearing up to be a celebratory year with record-breaking achievements on many financial and economic fronts. In particular, we just toasted the S&P 500 as it celebrated the ten-year anniversary of the secular bull market in March.

Following last December’s worst equity performance since 1933, concerns of an impending recession, tightening monetary policy, and a trade war with China were muted, allowing risk assets to recover from the December 24 lows.

The U.S. economy and various financial markets are poised to achieve historic milestones, some set to take place in the upcoming quarter. Consensus from the Raymond James Invest­ment Strategy Committee is that markets remain favorable, especially for investors maintaining a long-term time horizon. However, given the speed and magnitude of the first quarter rebound, the path ahead is likely to remain challenging.

The U.S. is the beacon of the global economy, with positive growth of 1.9% expected for the year, according to Chief Economist Dr. Scott Brown. Should the expansion continue past June, it will be the longest economic expansion on record.

Robust job growth, healthy consumer spending, elevated busi­ness and consumer confidence, and fiscal stimulus support our positive view. A “patient”, flexible Fed leads us to assign a 25% probability of a recession over the next twelve months.

Brown recently reported that the Fed is on hold for the foreseeable future, reflecting signs of slower-than-expected growth and downside risks. The fed funds futures are pricing in some chance of a rate cut by the end of the year.

Our expectation of a trade agreement between the U.S. and China should supplement growth globally as trade uncertainty fades. In the absence of an agreement, a softening global economy, that currently shows signs of strain, has the potential to spill over to the U.S.

Despite the slowing ascent of equities, with intermittent periods of downward pressure, we remain unwavering in our expectation of a higher equity market by year end. In fact, Managing Director of Equity Portfolio & Technical Strategy Mike Gibbs’ year-end target of 2,946 gives the market a realistic opportunity of returning to record highs. Supporting equities is his expectation of record earnings again in 2019.

Internationally, we favor the U.S. over other developed markets, as those economies continue to exhibit signs of weakness. European Strategist Chris Bailey believes that the Brexit debate is likely to edge towards a sensible compromise that will avoid a 'no-deal' scenario. Mean­while, this May's European Parliamentary elections will see populist parties make further gains although not take control. Looking at emerging market equities, the recent rally is likely to continue, especially if a U.S.-China trade compromise comes to fruition.

Despite healthy U.S. economic growth, record national debt, and a gradual reduction in the Fed’s balance sheet, the 10-year U.S. Treasury yield remains well below 3%. Nick Goetze, Managing Director of Fixed Income Services, expects rates to be capped through the end of the calendar year at 3.00%, due, in part, to the wide disparity between domestic yields and devel­oped world sovereign debt creating very strong global demand at current levels and the lack of inflationary expectations.

With slowing global growth and nascent inflationary fears, yields overseas are likely to remain depressed for the foreseeable future. In fact, the University of Michigan inflation expectations survey for the next five to ten years recently fell to 2.3%, tying the lowest level on record. Managing Director of Fixed Income Research Doug Drabik expects higher interest rates to con­tinue to face major headwinds likely keeping them range bound and low. The 2-10 year part of the Treasury curve seems to be pricing in one to two Fed rate cuts, thus giving the potential to steepen the curve from the current mark. Although the Treasury curve remains flat, the municipal and corporate curves are more positively sloped offering opportunities in the intermediate part of the curve.

Record oil production in the U.S. is expected to continue, with average daily production forecasted to reach approximately 12 million barrels per day (mm bpd) by year end. While this would normally place a cap on oil prices, two market dynamics are sup­portive. First, OPEC production cuts have reduced overall supply. In fact, total OPEC production is at its lowest level since 2015. Second, new global sulfur emission standards taking effect in Jan­uary 2020 will effectively erase as much as 1.5 mm bpd of supply. This, combined with our expectation that global oil demand growth will remain healthy, could allow oil (WTI) to move north of $70 per barrel by the end of the year, according to our energy research team.

Moving forward, it is not feasible for markets to continuously rise or fall, so don’t get caught up in the momentary noise. While records can be broken, we can’t lose focus on what the long-term trends are telling us. Staying disciplined during times of uncer­tainty and times of complacency is an essential characteristic of a successful investor.

Read the full April 2019 Investment Strategy Quarterly
Read the full April 2019
Investment Strategy Quarterly

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Fixed income investments may involve market risk if sold prior to maturity, credit risk and interest rate risk. Asset allocation does not ensure a profit or protect against a loss. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Chris Bailey is with Raymond James Euro Equities, an affiliate of Raymond James & Associates, and Raymond James Financial Services.