What can you expect in 2019? 2018 was a year of growth. We predict we’ll continue to see expansion in 2019.
The United States economy is now in its tenth year of expansion. Although we do believe we are in the later stages of the business cycle, we have not seen signs suggesting this expansion will not maintain. Going into 2018, we anticipated reduced monetary stimulus and policy tightening to be countered by continued growth in the United States. We saw growth driven by a strong consumer, tax reform, low and steady inflation, and unemployment rates that reached the lowest levels since the 1950s. Corporate profit growth was significant with FY 2018 earnings growth projected to be 25+%.
Many of these positive fundamentals were overlooked due to geopolitical disruption. Escalating trade tensions, especially with China, increased economic policy uncertainty. This uncertainty can reduce business investment, increase input costs and disrupt supply chains. The tensions, combined with Federal Reserve rate hikes, strengthened the U.S. dollar and added to stock market volatility that we believe was exacerbated by news headlines, fears of draining liquidity, and algorithmic trading.
International markets suffered from the same worries. We’ve seen relatively low economic growth outside of the United States, but we expect continued support for developed markets from accommodative monetary policy. Emerging markets may still face headwinds driven by a stronger U.S. dollar, higher U.S. bond yields and tighter global financial conditions. As economic growth moderates through 2019, those headwinds may fade.
At some point, the United States will have a recession, but data does not suggest a recession in the near future.
Uncertainty around monetary policy, interest rates, trade, and inflation highlight the need for diversification through various asset classes, geographies, and sectors. A very flexible approach to investing will be required even as positive indicators remain. The market backdrop remains supportive and trajectory is positive. Overall, we have seen sustained growth in the economy, but anticipate more moderate returns compared to previous years due to the length of the bull market.
We maintained a diversified approach to equity selection in 2018 with an emphasis on downside protection. We expected domestic equity returns to continue upwards driven primarily by corporate earnings growth. Expensive valuations, tightening of monetary policy and a tightening labor market dampened those expectations compared to previous years, although we maintained an overall positive outlook. In 2018 we did indeed see strong earnings growth domestically, but worries surrounding trade and rising interest rates drove an equity de-valuation in Q4 causing domestic and international stocks to finish negative for the year.
Looking to 2019 we remain constructive on U.S. stocks given current valuations and low probability of recession. Equity fundamentals such as earnings, investment spending, leverage, and corporate balance sheets have remained resilient through the negative sentiment and valuation pullback. Additionally, 2018’s robust earnings growth of 25+% has caused those valuations to look more attractive compared to historical averages. Bull markets are not typically known to end on low P/E multiples, so the risk/reward tradeoff compared to the beginning of last year when multiples were considerably higher, would seem to be quite a bit better.
We do expect lower earnings growth than 2018 and higher volatility due to slowing global growth. We maintain our overweighting to equities versus fixed income and to domestic versus international.
Fixed Income Perspective
Fixed income markets continue to price in a rising interest rate environment. The Federal Reserve issued four rate hikes in 2018, a faster pace than the three hikes expected entering the year. Throughout the past year, we maintained an underweight to fixed income compared to our benchmark as well as an underweight to duration (exposure to interest rate changes). Looking to 2019 we expect at least one rate hike.
While we do not disagree with the Fed, we have maintained our pursuit of relatively higher yield through implementation of risk appropriate holdings. For many of our portfolios, we have maintained a bond ladder consisting of finite maturity dates for much of the fixed income allocation. This strategy allows us to create an experience like holding individual bonds while providing the ability to reinvest maturing assets over time.
The bond ladder enables our clients to maintain a longer time horizon as those allocations are crafted with clients’ specific short, medium, and long-term goals in mind. In a bear market scenario, short and medium-term goals can be met by interest and dividend income supplemented by the fixed income maturities. In a bull market scenario, those goals can be met by equity appreciation.
The ladder contains both investment grade Exchange Traded Funds (ETFs) as well as alternative income ETFs which encompass high yield bonds, emerging market, and international bonds. The alternative income holdings help to drive higher yield while maintaining a shorter duration. We use diversified bond ETFs to maintain fixed income exposure for certain portfolios where the ladder approach is difficult to implement.
We continue to hold fixed income positions even as yields lag 30-year averages. Bonds, along with cash, act as diversifiers from the short-term volatility risk of stocks and lead to a well-balanced portfolio. We believe that making accurate timing calls on interest rate fluctuations are difficult to accomplish for any investor on a consistent basis.
In 2018 we saw steady economic growth and solid corporate profits overshadowed by political disruption, negative headlines, and fears of recession. We expect both global growth and corporate profit growth to slow moderately in 2019, but do not forecast a recession. Without a recession, it is unlikely that profits fall, and without profits falling it is unlikely that we see a sustained equity bear market.
We urge clients to keep a long-term mindset and believe that exposure to risk assets is important for meeting long-term goals, especially given that we still maintain a positive outlook for stocks.
Mitigating against downside risk will be crucial, and our diversified portfolios maintain a slight overweight to equities vs. fixed income with an eye on downside equity protection. In maintaining a diversified fixed income approach, we continue to hold both investment grade and alternative income holdings. As we watch interest rates slowly rise, we will continue to roll over our maturing bonds in the bond ladders.
All in all, our team looks back at 2018 with happiness and pride as we are very grateful to be helping our clients achieve their goals. We are looking forward to another wonderful year as a family serving your family in 2019 and beyond.
Synergy Capital Solutions is a group of investment professionals registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. Synergy Capital Solutions and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
This document was created for informational purposes only; the opinions expressed are solely those of Synergy Capital Solutions and do not represent those of HighTower Advisors, LLC, or any of its affiliates.