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(Runtime: 5 min, 14 sec; size: 3.60 MB)
Chris Ibach, global portfolio manager at Principle Global Equities.
The rally that we’ve seen thus far in 2019 in the U.S. looks likely to be sustained, for a little while anyway. What we saw at the end of 2018 was a culmination of a lot of different factors. In the third quarter we saw rates rising, oil prices rising, the Fed raising rates, continued Brexit concerns, a U.S. election, slowing China, as well as kind of a more hawkish Fed coming into the beginning of December that said they were going to shrink the balance sheet.
Then, as we moved into the latter part of December we really started to see things sell off and people looked very worried about a recession and things like that. But what we did see was at the end of December we have an illiquid period and the stocks continued to sell off quite aggressively at the end of the year. We stepped in and did a few things to take advantage of the situation but we felt that earnings were going to be OK. We weren’t banking on any sort of recession. We were going to see slowing earnings growth on the back of the tax cuts and that stimulus kind of rolling off, but that being said, we did see growth continue to slow as we moved through the third and fourth quarter from very strong readings in the middle of 2018. The most recent quarter wasn’t a total disaster. We did see growth slowing, but it’s still positive and did look more like just a slowing economy and there aren’t a lot of signs of inflation. There is some wage growth which is a bit difficult to deal with, but I think the economy can do that and deal with that. We continue to see slowing growth but positive growth. That case leads for a positive outlook for earnings and potential earnings growth.
Following the corrections that we saw, the valuations, in my opinion, are much more attractive today than they were nine months ago where we saw some of the biggest high fliers doing quite well. And then we saw the sell-off, which washed out a lot of the weak players. The market looks a lot better in the U.S., I think. We have come a long way since the beginning of January, but I do think we do have … the remainder of the year should be positive barring any exogenous events or the Federal Reserve remaining in their dovish stance and not becoming more hawkish.
With regards to forward looking in the rest of 2019, I do think we had a strong run here. I do think it’s going to be a bit slower through the rest of the year, but I think it will be positive on the back of a lot of more positive stances of all the central banks as well as some of the improving things we’re seeing in emerging markets. China is stimulating their economy, which is important to us because they will demand some of our goods. So that’s positive, and that’s probably the biggest positive that we see around the globe. It also looks like Brexit, which is not necessarily a huge deal for the U.S., but it is important in that there are some implications that could affect growth here. I think coming to a culmination there, it does look like things are going to be, in our opinion, less severe than what people were thinking. So that is positive.
We also have made it through the elections. We have a stable Congress. Going forward, we did have the government shutdown. That should spur, I think, some growth from that shutdown that we had earlier in the year, and I think just the general economy is doing OK. There’s no signs of inflation. Wage growth is manageable. We’re actually seeing pricing pressure in some of these companies in retail struggling to keep up with Amazon and some of the technological changes that are going on. So it’s really important to keep in the right areas and not look at the old winners of the past, the GEs of the world, but look to the new companies that are becoming very significant players, being Facebook, Google, Apple. These companies are going to change the world with regards to media, how it’s delivered, streaming, the online experience. I’m going to throw Amazon in there as well. I think these companies look a lot more attractive today than they did, and I think going forward still sets the stage for a more positive rest of the year.