Suntrust IAG: Outlook 2019
Title card: Keith Lerner, Managing Director & Chief Market Strategist
At SunTrust, we’re committed to uncovering and analyzing long-term trends and near-term influences that create investment opportunities for our clients.
The Carousel of Concerns, a mainstay of this market, continues to turn. As one worry recedes, another comes to the forefront.
In 2019, investors will grapple with concerns including a peak in economic and earnings growth, and wild cards on trade and monetary policy. The reality is the future is always uncertain; however, long-term investors are now being better compensated for taking on uncertainty as valuations have improved across the capital markets.
Against this backdrop, we focus on three main themes.
Title card: Michael Skordeles Director of U.S. Macro Strategy
Our first theme is moderating growth.
The global economy is moderating but recession risks remain low.
We expect the U.S. expansion to surpass 10 years, making it the longest in history.
Economic growth is set to modestly downshift from around 3% in 2018 to above 2.5%. This is still solid growth and above the average of this recovery. The economy will be aided by a healthy consumer, government spending, and capital investment.
Economic activity in Europe and Japan should muddle along, while China’s growth stabilizes as stimulus measures take hold. This should be a positive influence on global trade and emerging markets.
Risks to watch include trade tensions, tightening monetary policy, U.S. legislative gridlock and new leadership in key European nations. Nevertheless, we still expect positive economic activity.
Our second theme is a balancing act for global stocks.
We expect markets to remain choppy given the carousel of concerns but anticipate modestly higher equity prices. While there are several wildcards facing investors, part of this uncertainty is already reflected in stock prices. Globally they are trading at the cheapest valuation in years. It is also important to note that earnings tend to rise outside of recessions.
From a positioning standpoint, we maintain a slight bias to the U.S., where the economy remains on solid footing and should support mid-single digit earnings growth. U.S. stocks have risen 85% of the time during expansionary periods. We remain underweight on developed international equities, primarily in Europe. There, attractive valuations are offset by tepid profit trends and geopolitical risks.
Japan looks more attractive given better earning trends and political stability, though a potentially higher consumption tax weighs heavily. We expect China to do whatever it takes to aid its economy including higher government spending, increased bank lending and a more competitive currency. This is a positive for emerging markets and we will look for opportunities to raise allocations as valuations are attractive after a difficult 2018.
Title card: Andrew Richman, Managing Director of Fixed Income Strategy
Our third theme focuses on interest rates.
After a sizable step up in rates over the last year, the starting points for fixed income investors have improved, and bonds will likely see better returns. As we enter 2019, we expect the Federal Reserve to raise rates twice, which will bring short-term rates closer to a neutral level. After three-plus years, we believe the bulk of the Fed’s tightening cycle is now behind us. However, the path will be highly dependent on economic data amid the carousel of concerns.
We anticipate the 10-year Treasury yield to move into a modestly higher range. The downside should be limited by tight labor markets and a growing supply of bonds as the Fed unwinds its balance sheet and the fiscal deficit deepens. The upside should be capped by slowing global growth and contained inflation trends given U.S. dollar strength, contained oil prices, and moderating housing. From a positioning standpoint, we are focused on high-quality bonds with a slightly shorter duration which offer improved yields and should act as a portfolio stabilizer during soft patches.
In 2019 investors should expect price swings to remain elevated as the carousel of concerns continues to turn. We still anticipate a modestly positive year for financial markets. Importantly, we expect tactical opportunities as markets overshoot in both directions, and investors should be prepared to adjust as the evidence shifts.
Your SunTrust advisor can help you learn more about how these investment themes will impact your portfolio. We look forward to keeping you informed on our investment views as the year unfolds.
Lerner, Skordeles and Richman are Investment Adviser Representatives, SunTrust Advisory Services, Inc.
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