JP Morgan 2019 Investment Outlook: Late-Cycle Risks & Opportunities

  • The U.S. economy should slow but not stall in 2019 due to fading fiscal stimulus, higher interest rates and a lack of workers. Even as unemployment falls further, inflation should be relatively contained
  • Central banks in the U.S. and abroad will tighten monetary policy in 2019 – this should continue to push yields higher. In the later stages of this cycle, investors may want to adopt a more conservative stance in their fixed income portfolios
  • Higher rates should limit multiple expansion, leaving earnings as the main driver of U.S. equity returns. With earnings growth set to slow, and volatility expected to rise, investors may want to focus on sectors that have historically derived a greater share of their total return from dividends.
  • After a sharp fall in valuations in 2018, steady economic growth and less dollar strength may provide international equities some room to rebound in 2019. However, the climb will be bumpy and investors should ask themselves, in the short run, whether they have the right exposure within different regions and, in the long run, whether their exposure to international equities overall is adequate
  • There are significant risks to the outlook for 2019. The Federal Reserve may tighten too much; profit margins may come under pressure sooner than anticipated; trade tensions may escalate or diminish; and geopolitical strife may force oil prices higher
  • Timeless investing principles are especially relevant for investors in what appears to be the later stages of a market cycle. Investors may wish to tilt towards quality in portfolios along with an emphasis on diversification and rebalancing given higher levels of uncertainty
  • Earnings growth looks set to slow from the +25% pace seen this year, but does not look set to stop; consensus forecasts point to annual earnings growth of 10-12% next year; this could provide support for the stock market to move higher
  • Risks to earnings, however, lie in profit margins and trade. With both wage growth and interest rates expected to rise further next year, margins should begin to come under pressure. Profit margins should revert to the trend, rather than the mean, and as such we are not expecting a sharp adjustment from current levels
  • Short-term interest rates are now positive after adjusting for inflation, creating some viable competition for stocks
  • Fundamentals themselves were positive in 2018 but a multitude of risks dented investor confidence, causing significant multiple contraction and currency weakness across major international regions; as a result, the question for 2019 is whether the fog will begin to lift, improving sentiment toward international investing and permitting international equities to take off once again
  • Ultimately, we expect the multitude of stimulus measures from the Chinese government to provide a floor to Chinese GDP growth at 6%; should economic data falter more than expected, we expect the Chinese government to enact further fiscal stimulus in order to shore up activity and confidence
  • Being late cycle may invoke troubling memories of 2008; however, fundamentals suggest that today’s financial environment is quite different. This late-cycle period could be long, sticky and drawn out, just like the broader cycle; calling the end would be a fool’s errand, and could result in missed opportunities
  • Some good rules to follow include: using a “dimmers” approach to asset allocation; employing strategies to participate in the upside, while trying to mitigate downside risk through hedging; avoiding big directional calls, concentrated positions or risky bets; retaining good quality fixed income, even if recent performance is disappointing; have a bias to quality across asset classes; prioritize volatility dampening; and take capital gains where it makes sense; most importantly, rebalance, stick to a plan and remember: get invested and stay invested

JP Morgan Investment Outlook for 2019

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