Wage growth remains in our top spot for 2019, similar to our 2018 stance. The impressive payroll gains of the currently mature tight labor market have yet to fully translate to higher hourly earnings. The marginal upside trend in 2018 proved positive and the possibility for further gains remains intact and highly possible in 2019.
Consumer health remains a strong point for 2019 given that U.S. households remain in a fiscally sound position and are maintaining upbeat sentiment, despite equity market volatility heading into 2019. Such optimism has the ability to further support corporate earnings and maintain strong U.S. equity market fundamentals.
The fundamental building blocks and current structure of corporate earnings, and that of balance sheets, remains positive as we look ahead to 2019. Earnings trends do not indicate signs of stress while corporate profit guidance remains within a reasonable growth assumption relative to expected economic growth, as depicted by the Federal Reserve’s growth forecast. Additionally, overall corporate cash flow is starting the year at the highest level on record and has the ability to mitigate perceived downside risk in the near-term. When combining such observable data with attractive global equity market valuations, we believe the notion of objective risk-on sentiment bodes well for global equity participants.
Our stance for the dollar has improved for 2019 given the strength we experienced in 2018. Policy driven sentiment may help subside further strength and may guide the dollar sideways through the year. This may be a positive for U.S. investors that remain globally diversified.
We classified monetary policy as a risk in our ‘View of 2018’ and we have since shifted to a more neutral risk undertone. Given the equity market volatility in late 2018, and considering the Fed’s willingness to maintain a sustainable economic environment, the likelihood of further interest rate increases remains low.
The prospect of subdued monetary policy, alongside a fiscally healthy consumer, may guide global equity markets to historically neutral returns in 2019. Such a classification may be indicative of single digit returns amidst an environment that is converging on the late stages of the global business cycle. The likelihood of normalized historical volatility, in the form of multiple double digit corrections, may also be in play. Along with fiscal policy and trade war uncertainties, 2019 may present multiple opportunities for reassessing equity level risk profiles. Global diversification may benefit U.S. investors in 2019, despite the headline risks in the Europe Union, and may be aided by the potential for subdued U.S. dollar movements.
Risk and Uncertainty
Geopolitics and global trade discussions remain our top two uncertainties for 2019. Classifying these topics as risks remains difficult because that would imply a calculated defense mechanism exists against unfavorable outcomes, which is not the case. On the notion of trade, further tariffs on Chinese goods, as well as continued domestic protectionism discussions by the White House, may further amplify weaker market sentiment and, in turn, reduce global demand for U.S. goods. Such sentiment has the ability to guide equity market participants away from fundamentals and into irrational behavior.
The ongoing volatility risk of oil prices may find room for improvement in 2019 but we do not yet believe a sustained path to price normalization to be intact. Major oil producing countries have repeatedly failed to act on promised production cuts. We remain skeptical yet opportunistic on the price of oil.
Political risks in the Europe Union remain active given adjustments in the United Kingdom and the fiscal proposals in Italy. Selective and calculated allocations in the region remain favorable yet we remain opportunistic in the region as a whole.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. International investing involves special risks, such as currency fluctuation and political instability, and many not be suitable for all investors. There risks are often heightened for investments in emerging markets.