A Scoop of Insight for your Piece of the Pie: Outlook for 2019

Delwin Graham - Jan 15, 2019
What a difference a year makes.

What a difference a year makes. Last year began with optimism. The Trump corporate tax cuts ushered in a period of global synchronized recovery, with historically low volatility, extreme bullishness, a ramping economy, and the potential for greater-than-20% average earnings per share (EPS) growth in the S&P 500 (which is good). We begin 2019, however, with a synchronized global slowdown, high volatility, extreme bearishness, a sharply slowing economy, and the potential for flat earnings growth in the S&P 500. What happened? (Cf., Tony Dwyer, “January Strategy Picture Book”, Market Strategy, Canaccord Genuity, January 7, 2019).

Tony Dwyer, the Chief Market Strategist at Canaccord Genuity, characterizes the 20% drop in the S&P 500 (SPX) from the September peak as a market “crash” – the fourth market non-recession crash since 1950. Whereas the market crash in 2008 was a credit-driven economic crisis caused by severe limits on lending, that is, the banks didn’t want to lend any money, the most recent equity market decline is said to be a policy-driven market event based on mistakes by the U.S. Fed. The Chairman of the U.S. Federal Treasury, Jerome Powell, has raised interest rates much too quickly in an effort to damper economic growth and reduce inflationary pressures, especially wage inflation. Average EPS growth for the SPX is expected to be around 5% in 2019. Economic growth is slowing, but the fear of a recession, that is, actual economic decline, is probably overblown (Cf., Dwyer, “January Strategy”, Market Strategy).

Whereas global growth had been slowing in early 2018, the US economy was a high-growth outlier due to the economic stimulus afforded by the Trump tax cuts. That growth has decelerated due to U.S.-China trade barriers, interest-rate hikes, and the fading impact of the fiscal stimulus. In hindsight, we might say that the U.S. equity markets were prone to correction as valuations were stretched. While richly valued sectors, such as technology, had led U.S. indices higher while international markets lagged, rising interest rates caused earning multiples to contract and stock prices to fall. Hence, the recent “crash”.

The market remains very emotional and seems to rise and fall on the basis of President Trump’s most recent tweet. In such turbulent times, investors are likely to reward stability. Martin Roberge, Canaccord Genuity’s Managing Director of North American Portfolio Strategy, advocates a defensive equity-sector posture with the utilities, staples, energy, and health-care sectors expected to outperform, and consumer discretionary and technology to underperform. Value will usurp growth. As a result, the right sector strategy in 2019 might be a “barbell” approach, with defensives (e.g., utilities and staples) on one side and value plays (e.g., energy and materials) on the other (Cf., Martin Roberge, “Top Picks for 2019”, Canadian Equity Research, Canaccord Genuity, January 7, 2019).

Active portfolio management should be critical in 2019, as should be careful stock selection. Investors will no longer be able to rely on indices and ETFs rising, thereby lifting all boats. As always, there will be opportunities to profit. Please contact me (dgraham@cgf.com; 780-408-1518) for more details and a few actionable ideas.