In 2018, U.S. stocks were volatile but generally rewarding through September 30, only to stumble badly in the fourth quarter and generate the S&P 500’s first negative year since 2008. The damage was shared. On a global basis, nearly all major asset classes were down—the kind of consistency you would just as soon avoid.
The overall driver seems to have been fear: regarding potential overreach by the Federal Reserve and slower growth in China, with trade conflict and political uncertainty mixed in. Add some technical factors, including poor liquidity and tax-loss selling, and you had the makings of a substantial downturn.
Early in 2019, the narrative and, consequently, results have been more positive. Fed officials are taking a more dovish tone; the U.S. and China are finding more common ground; and there’s a sense that the late-year swoon may have gotten ahead of itself.
Should investors be wary at this point? The economic cycle is likely in the later rounds, the monetary shift from “QE to QT” is a natural headwind, and earnings growth is slowing. Still, the picture remains fairly balanced. Rather than a steep slope from 2018’s stellar growth, we anticipate a soft economic landing in 2019, with U.S. GDP gains of 2.0 – 2.5%. Meanwhile, non-U.S. economies could see budding recovery, supported by China’s stimulus and, potentially, further thawing on trade.
U.S. equities look attractive if you think (as we do) that recession isn’t coming this year. Potential S&P 500 earnings growth of 5% coupled with buybacks and some multiple expansion could produce a respectable year, assuming sentiment doesn’t overwhelm fundamentals. Still, more attractive opportunities may be available in non-U.S. markets—particularly in the emerging world and, to some degree, Japan, where stocks can come off a lower valuation base. We are more cautious on Europe, where geopolitical risk is in the water.
In fixed income, the Fed’s current pause on rates—even with the continued roll-off of balance sheet assets—should give investors a little more breathing room. With wider credit spreads, we see select opportunities in medium- to highly rated bonds, particularly at shorter maturities.
All told, the market seems a bit tired, but still in fighting shape as momentum slows. In this conflicted environment, our latest Investment Quarterly explores potential ways to help “weatherproof” individual wealth plans for market turbulence and life events. We also consider the merits of staying invested through volatility, and present our “Ten for 2019” trends for this year. Other topics include the role of private equity in portfolios, the move toward “cashless” payment and ways to gain more control over your charitable dollars.
I hope you enjoy this issue of IQ. As always, please do not hesitate to contact your Neuberger Berman representative with any questions about the markets or your portfolio.
From the Asset Allocation Committee
U.S. Equities: We upgraded small, mid- and large-cap equities from neutral to overweight outlooks over the next 12 months. U.S. economic growth is likely to converge with that of non-U.S. markets, while we believe U.S. earnings growth will slow into the single digits this year. Still, fourth-quarter declines brought U.S. equity valuations to the lower end of their historical range, creating potential for multiple expansion.
U.S. Fixed Income: Although maintaining an underweight view of government bonds, we upgraded some investment grade credit and securitized products. In our view, shorter to medium maturities show relative potential, while credit selection has become more important with wider credit spreads. Treasury Inflation Protected Securities (TIPS) remain an overweight given rising wages and upside potential in consumer prices. Overall, we believe the Fed’s likely pause in rate hikes should lessen pressure on bond markets.
Non-U.S. Equities: We reaffirmed our bias toward global stocks, moving from neutral to overweight in developed markets and keeping an overweight in emerging markets. Investors are underestimating China’s ability to stabilize its growth trajectory and thus support the softening global economy, and monetary policies remain accommodative. We favor emerging markets and Japan, but are somewhat cautious on Europe given political challenges.
Non-U.S. Fixed Income: Despite short-term volatility and worries over trade, we believe emerging market debt valuations remain attractive in light of last summer’s sell-off. Developed market fixed income remains an underweight as the ECB and Bank of Japan are lagging the U.S. in tightening monetary policy.
Alternatives: We moved private equity from overweight to neutral in light of extended buyout valuations. However, the asset class remains attractive in our view versus public markets; we particularly favor higher quality businesses in the buyout sector and opportunities in niche areas and private debt markets. Low-volatility and directional hedge funds remain committee overweights.
Commodities: We upgraded commodities to an overweight view in light of OPEC’s agreement to curb output while recognizing the risk posed by short-term supply uncertainty, U.S. production and an uncertain global economy. Poor performance in industrial metals appears based on trade-related sentiment rather than a lack of demand; an easing of tensions could prove supportive to these metals and to key agricultural commodities.