The rally in U.S. equities will likely continue despite slowing economic growth, according to portfolio manager Chris Ibach.
“The most recent quarter wasn’t a total disaster,” said Ibach of Principal Global Equities in Des Moines, Iowa, in a Mar. 14 interview.
“We did see growth slowing, but it’s still positive.”
U.S. growth slowed to an annual rate of 2.2% in the fourth quarter of 2018, down from 3.4% in the third quarter. Many economists think growth continued to slow in the first quarter of this year to a 1.5% rate.
“We continue to see slowing growth but positive growth,” Ibach said. “And that leads [to] a positive outlook for earnings and potential earnings growth.”
The S&P 500 just finished its best quarter since 2009, gaining 14% in Q1 2019.
Ibach said that December’s market sell-off made “valuations more attractive today than they were nine months ago, where we saw some of the biggest high flyers doing quite well.” The sell-off “washed out a lot of the weak players. So the market looks a lot better in the U.S.”
Ibach said his team took advantage of the “illiquid period” and recessionary fears last December. “We felt that earnings were going to be OK. We weren’t banking on any sort of recession.”
Another factor that’s adding to the current rebound in U.S. equities is that central banks are pausing after a period of rate hikes. After raising interest rates four times in 2018, with the final increase in December to a range 2.25% to 2.5%, the Fed held in January and in March, and projected no rate hikes for 2019.
Further, there are improvements in emerging markets, Ibach said.
“China is stimulating their economy, which is important to us because they will demand some of our goods,” said Ibach, whose firm is one of three managers of the Renaissance Global Equity Private Pool.
He added, “The remainder of the year should be positive barring any exogenous events.”
The key when selecting stocks, said Ibach, is to focus on new companies and “not look at the old winners of the past—the GEs of the world.”
He likes tech companies including Facebook, Google, Apple and Amazon.
“I think these companies look a lot more attractive today than they did,” he said.
Over the last year, Facebook’s stock hit a high of US$217 in July 2018. It fell to US$124 during the December sell-off and opened at US$166.39 on April 1.
The stock of Google’s parent company, Alphabet, has gone from a high of US$1,268 in July 2018 to a low of US$976 in December. On April 1 it opened at US$1,174.90.
Apple’s stock hit a one-year high of US$232 in October 2018 before falling to US$142 in early January. It opened April 1 at US$189.83.
Finally, over the last year Amazon’s stock experienced a high of US$2,039 in September 2018 and dropped as low as US$1,343 during the sell-off. It opened at US$1,786.58 on April 1.
“With regards to the rest of 2019, I think we’ve had a strong run here,” added Ibach. “I think it’s going to be a bit slower through the rest of the year, but it’s going to be positive.”
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