Happy New Year! During the last month, Rob and I have had the pleasure of visiting with the Goldman Sachs asset managers and folks from JP Morgan Chase (JPM) to learn their views of the market and to see what they think the market has in store for 2019. It is always nice to hear directly from Wall Street’s best and brightest, particularly during times of market volatility.
According to JPM, the US economy should slow but not stall in 2019 due to fading fiscal stimulus, higher interest rates and a lack of workers. In addition, we know from the recent Fed meeting that banks will continue to raise interest rates which will continue to push yields higher. As a result of these forces, JPM is recommending that investors focus on dividend paying stocks as a way to lock in yield. International and emerging equities may also be another area of focus due to a sharp fall in valuations and anticipated weakening of the dollar. We believe that there are bargains to be had there and elsewhere for the steady and long-term investor.
For 2019, the focus needs to be on pressure points. We believe that the expansion will continue, but the pace of growth will decelerate. Monetary policy will hurt (from Quantitative easing to quantitative tightening), and we anticipate one rate hike next year (not two or three). We are also watching the continued populism, here and abroad, which may present continued short-term risks to the market.
We also wanted to add the thoughts of one of our favorite portfolio managers, Jeffrey Gundlach. He reminded us in a recent interview that 2018 was a year where virtually every asset class has suffered negative returns. But, according to Gundlach, emerging markets is where investors should put their money “over the next seven and certainly the next 20 years.” We were reminded that the price earnings ratio for emerging markets is less than half of the Standard and Poors 500 Index, and based on that metric alone, Gundlach says that “emerging market equities could outperform the US stocks by 100%.” In addition, it is estimated that nearly 90% of millennials worldwide reside in emerging markets, and EM has beaten domestic equities during previous rate hikes. We acknowledge that investors should expect more volatility in emerging markets, but nevertheless a good investor should always be on the hunt for value and long-term investing opportunities when they show themselves.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.