2019 has been favorable for investors thus far. 2018 ended with cash as the best-performing major asset category due to a significant swoon in global equities. Investors sold riskier asset classes to express concerns about central banks, most notably the United States’ Federal Reserve (Fed), deepening commitments to raising interest rates. However, thanks to a weakening global economic trajectory emerging across the globe late last year and into this year, the Fed began an about-face and is expected to lower interest rates later this year. We continue to advocate a “balanced” approach within client portfolios and respect the range of outcomes the back half of 2019 could deliver. Anticipating central bank and trade policy outcomes is a challenging exercise, but we can gauge the intersection of investor psyche and fundamentals with great confidence. We expect global economic weakness to persist as we get deeper into this year, especially given the comparison period of this time last year when corporate profits were considerably more robust. Inflation, the economy’s kinetic energy, remains low, providing central banks with cover for pro-growth policies should growth dampen further.
Given how “narrow” investment returns have been since global equities bottomed in March 2009, investors have not had to be overly diversified. However, we anticipate that phenomenon will change and we encourage investors to hold “intentional” exposures in the form of high-quality equities, bonds that act like bonds and exposure to diversifying return streams that look nothing like stocks and bonds.
Key takeaways: 3Q 2019 investment outlook
- First quarter U.S. gross domestic product (GDP) growth diverged positively from the rest of the world, but higherfrequency data has softened through the second quarter, increasing our conviction of a 2019 slowdown from an average around 3 percent in 2018.
- A “muddle-through” scenario is likely to continue for Europe and Japan as growth trends have stabilized after strongly negative trends into the first quarter of 2019.
- Trade remains a front of mind concern for emerging markets economies. The ‘dovish’ pivot by the Fed and European Central Bank (ECB), combined with China stimulus, should support stabilization over the rest of 2019.
- Despite trade tensions, U.S. equity market performance has been resilient. Looking forward, fundamentals remain supportive, but price gains are likely to be more modest.
- We see risks and opportunities as balanced across foreign markets and maintain a neutral outlook, despite the solid start to 2019. Dovish global central bank policies and stabilizing economic data are likely to be countered by rising uncertainty around global trade.
Fixed income markets
- Yields are low by historical standards and markets appear to be pricing in multiple interest rate cuts, with the first cut expected at the Fed’s July or September meeting. We continue to emphasize that high quality bonds should form the primary share of fixed income allocations to provide adequate diversification.
- Credit valuations have cheapened, though fundamentals have deteriorated somewhat. We recommend normal allocations to credit exposures despite these risks to capture relatively normal yields.
- Municipal bond (muni) valuations are expensive by historical comparisons but remain attractive for high tax bracket investors.
Real asset markets
- Commercial real estate returns have been supported by lower interest rates in the past quarter and prices have increased to near all-time highs. We do expect property market fundamentals to deteriorate slightly from current levels. However, investors should still receive current income, maintaining modest returns.
- Hedge funds have been plagued by the quick market shifts between “riskon” and “risk-off” market action. Our preference for selecting hedge fund managers is for those investing in growth sectors, such as Healthcare and Technology, that have more persistent influences on demographics and productivity than do transitory tweets and speeches.
- We remain concerned about the rush of capital from investors seeking higher returns and the increasing competition among private lending and private debt funds. In this environment, we recommend investing with funds that have been through multiple economic cycles and have demonstrated investment discipline.
For more information:
A detailed version of our 3Q 2019 investment outlook commentary is available. To access a copy, please click the PDF links found on this page or contact your U.S. Bank Wealth Management professional or U.S. Bancorp Investments Wealth Management Advisor if you have questions.
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This commentary was prepared June 2019 and represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are not intended to be a forecast of future events or guarantee of future results and is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank or U.S. Bancorp Investments in any way. U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.
Diversification and asset allocation do not guarantee returns or protect against losses. Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.
Past performance is no guarantee of future results.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes but may be subject to the federal alternative minimum tax (AMT), state and local taxes. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties (such as rental defaults). Hedge funds are speculative and involve a high degree of risk. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem or transfer interests in a fund. Private capital investment funds are speculative and involve a higher degree of risk. These investments usually involve a substantially more complicated set of investment strategies than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales, which can magnify potential losses or gains. Always refer to a Fund’s most current offering documents for a more thorough discussion of risks and other specific characteristics associated with investing in private capital and impact investment funds. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies.
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