Investment Insights: Waiting for a catalyst

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

After an awe-inspiring first few weeks of the year for financial markets, investors seem to be waiting for the next big catalyst to send markets higher – or lower.

After hitting a rough patch in the last few months of 2018, the S&P 500 rebounded to gain over 10 percent in just the first two months of the year, which is already higher than the full calendar year returns in three of the last five years. If stocks continue at this pace for the rest of the year, the S&P would return over 100 percent in 2019! Unfortunately, we don’t see that as a likely scenario.

Our team sees U.S. stock markets in overbought territory and the recent gains are not reflecting a sustainable pace. Investors may already be reaching that realization as trading in the past few weeks has been fairly flat. While market fundamentals are relatively positive, they may not support such drastic increases in prices. Typically, the main driver for stock returns has been earnings, which will likely struggle to grow in the coming quarters after such a successful 2018. Wall Street analyst estimates, aggregated by FactSet, are showing that earnings in the first quarter will actually decline 2.7 percent on average compared to the same period last year, and that earnings may grow less than 5 percent over the full 2019 calendar year. If stocks are to continue their climb higher, positive developments in geopolitics and monetary policy, along with an accompanying upturn in sentiment, will likely be needed to fuel any further advance.

The U.S.-China trade dispute is continuing to de-escalate as leaders of both countries meet for additional talks. President Trump moved forward with his earlier comments to extend the ongoing trade truce and delay any further tariff increases so negotiations can continue. We welcome the positive news on this front, but markets may have already priced in much of this optimism, which would likely dampen the market’s reaction once a trade deal is officially reached. Monetary policy will also be top-of-mind for investors as Fed Chairman Jerome Powell concludes his semi-annual testimony to Congress on the state of the economy and the goings-on within the Federal Reserve. Powell’s counterpart in Europe and the President of the European Central Bank, Mario Draghi, emphasized downside risks to the region in minutes from their January policy meeting.

While the Global Investment Management team is searching for potential events that could spark another leg up in stocks, we would expect any additional upside to be the result of positive developments in geopolitical issues. For example, the U.K. administration is currently attempting to delay the deadline for Brexit, which would provide more time to negotiate a real plan versus exiting without one; however, the EU may simply decline any sort of extension. We are considering reducing exposure to select stock sectors over the coming weeks based on the lack of market drivers. For now, we are keeping our eyes on economic data, such as the GDP report that comes out tomorrow, and on financial market fundamentals.

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

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