U.S. economic growth and data may soften during the first half
of the year due to global growth conditions and the impact of a
government shutdown. Even so, we do not expect a U.S. recession
in 2019, particularly given the absence of high inflation, aggressive
tightening and asset price “bubbles.” Employment data is strong
and wage growth gives a boost for consumers. Inflation is subdued
and the Fed has affirmed its commitment to a data driven approach,
which should result in fewer rate hikes than markets anticipated just
a few months ago.
Recent earnings announcements have boosted Wall Street sentiment,
and we believe many corporations are positioned for additional
upside as they benefit from deregulation, tax reform and a healthy
U.S. consumer. The rate of corporate earnings growth is likely to be
more measured due to weaker global demand, and more companies
may guide downward, taking cover in Apple’s recent caution. Equity
valuations in many areas of the market are not extreme based on
earnings expectations—especially after the fourth quarter selloff.
In regard to potential headwinds, many of the same political and
geopolitical unknowns that rattled the markets in 2018 are unresolved.
A high level of global uncertainty (Figure 2) could foment volatility
over these next months. We also believe uncertainty about policy and
policy impacts have contributed to the recent weakness in sentiment
driven “soft” data. While policy calls are impossible to make with
certainty, we are hopeful that trade and fiscal policy move to a
more accommodative stance as the year progresses, just as the tone
of monetary policy has recently become more accommodative. We
believe this could help stabilize growth at a more favorable level in the
second half of 2019 and into 2020. Any reduction in uncertainty is also
likely to be welcomed by the markets.
We are closely watching for signs of growing pressures in corporate
credit as corporate profit growth decelerates. One risk on the horizon
is that markets confront a significant wave of forecast downgrades—
for economic activity, sales, and profit margins across the U.S. and
other major markets.
Our U.S. equity positioning favors companies that offer pricing power,
quality earnings and resilient balance sheets. We are monitoring the
impact of slowing global demand on individual companies and sectors.
Across sectors, we are mindful of security valuations. Growth-oriented
companies are likely to lead at this point of the cycle, and technology
innovators and companies positioned to benefit from U.S. consumer
strength are well represented in our strategies. We have identified
more cyclically oriented opportunities for growth as well.