Helpful miscellaneous articles regarding
our retirement plan and planning. Like
you, I review my retirement nestegg and plan from time to time. Recently, I went though some continued
education for some credentials I maintain and it occurred to me that we all
could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
Heritage Wealth Advisors Second
Quarter 2019 Market Outlook
What a
difference one quarter can make... The first quarter of 2019 was in sharp contrast to the final three months of 2018
when global equities experienced a correction
driven by monetary policy,
growth, and trade concerns. U.S. equities rebounded,
posting the best start to a calendar year since 1998, while international stocks were not far behind. Cautious
optimism has replaced the negative sentiment pervasive
in capital markets at year end
as investors have adjusted to the monetary policy
pivot by the Fed along with a broad reset in earnings growth expectations. Below, we reflect on the moves that we made
in client portfolios amid this evolving backdrop
and share our outlook for financial markets.
Entering 2019, sentiment reached pessimistic levels as investors reacted to
tighter financial conditions,
peaking earnings growth, and elevated geopolitical risks. At the time, we believed that financial markets
were pricing in a deeper
economic slowdown than the
underlying data was suggesting. Economic growth was decelerating from an above-average
pace but remained positive; the Federal Reserve was signaling an intent to be more measured going forward; and
valuations were attractive.
Given a more favorable risk-reward environment, we increased client portfolio
allocations to equities above
long-term strategic targets.
Specifically, we eliminated exposure to bank loans and invested the proceeds in U.S. large cap
and small cap stocks as well as
reinitiated a position in
emerging market stocks, which had been absent from client portfolios since mid 2018. Domestic stocks led the rebound in
global equities during the first quarter with
the S&P 500 returning 13.7% and the Russell 2000 index returning 14.6%. Emerging market stocks, as measured by the
MSCI Emerging Markets index, returned 9.9%.
Additionally, we utilized the market selloff to upgrade the quality of
portfolios at year end. For
example, we reduced exposure to master limited
partnerships (“MLPs”) in favor
of U.S. large cap stocks. While our outlook for MLPs remains positive, the ability to shift into businesses with
higher quality balance sheets at comparable valuations
was compelling. Furthermore, we removed the currency hedge in our international
stock holdings based on a view that the U.S. dollar should modestly weaken over the intermediate term. While the
dollar ended the quarter essentially flat, international
developed market equities, as measured by the MSCI EAFE index, returned
10.0%. Lastly, in February, we established a tactical position in U.S. homebuilding stocks given a positive outlook
for the U.S. housing market. In
determining our outlook for financial markets and resultant client portfolio allocations,
we focus on four mains areas: monetary policy, fiscal policy, underlying economic data and corporate fundamentals,
and valuations. After signaling in December
an intent to be more data-dependent,
the Federal Reserve indicated in March that
changes to its policy rate are
unlikely in 2019. This pause in monetary tightening is reflective of weaker economic data
coupled with continued benign inflation. Fixed income
markets are currently pricing in interest rate cuts. Consequently, as shown below, financial conditions have eased which should provide
a tailwind for economic growth in
the second half of the year. We do not expect the Fed to resume tightening without evidence of a sustained
reacceleration of growth.
Heritage
Wealth Advisors Second Quarter
2019 Market Outlook With respect to fiscal policy, lower corporate tax rates and
a looser regulatory framework
should continue to provide a tailwind for economic growth, albeit a moderating one. While fiscal stimulus should
support growth over the short term, rising
fiscal deficits in an economic expansion potentially
weaken the government’s ability
to use it as a tool in the next recession.Although
economic growth has slowed both domestically and abroad, underlying data remain healthy. The Fed is projecting
annualized U.S. real GDP growth of 1.3% in the first quarter of 2019, down from 2.2% registered
in the fourth quarter of 2018. While the
government shutdown weighed on economic growth in January, history suggests that it will not have lasting effects. Any discussion of the U.S. economy should
begin with the consumer, which, as depicted
below, continues to exhibit positive fundamentals: household debt-service ratio
below pre-recession levels, an
elevated savings rate, and increasing average hourly
earnings. Likewise, corporate fundamentals remain strong, as demonstrated by aggregate debt-to
-assets below pre-recession
levels and solid interest coverage. Capital spending
intentions have weakened but reside above the historical average while manufacturing and service activities continue
to expand. Additionally, the
housing industry appears to be
setting up for a recovery given declining mortgage rates, low vacancy rates, and an aging capital stock.
In February, we initiated a tactical position in
U.S. homebuilding stocks based on a view that improving fundamentals should translate into attractive returns.
Heritage Wealth Advisors Second
Quarter 2019 Market Outlook Overseas, monetary and fiscal policy remain accommodative
although the capacity to stimulate
growth seems muted. In Europe, easing financial conditions coupled with increasing trade should result in a pickup
in growth. The health of China’s economy has
important implications for
global growth, and our outlook remains constructive. A bilateral trade agreement between China and
the U.S. would likely provide a tailwind for
global growth. On the monetary and fiscal front, Chinese authorities have
enacted numerous measures to stabilize the economy. As
shown below, credit and fiscal
Heritage Wealth Advisors Second
Quarter 2019 Market Outlook
impulse
appears to have reached a positive inflection point which should offer a boost to growth. A reacceleration of global growth
would likely provide a tailwind for emerging
market stocks. With these
considerations, we initiated a modest position in emerging market stocks during the quarter. While our outlook for global growth and
equity markets remains positive, the rebound in
stocks has resulted in valuation multiples expanding back to levels that we
associate with fair value.
Although earnings growth expectations appear conservative, current valuation levels support pulling back our
overweight allocation to equities in client portfolios
(see below). Consequently, we have
taken steps to lower equity exposure in line
with long-run strategic
targets.
Heritage Wealth Advisors Second
Quarter 2019 Market Outlook
While we believe in the long-term benefits of global diversification, we
continue to favor the U.S. over
international markets given stronger underlying economic growth.
We would consider increasing exposure to international equities with evidence of a durable pickup in global growth. Slower
U.S. growth converging with international growth
rates should result in a weaker dollar, representing a potential tailwind for global growth. In fixed income, we favor short-duration securities as a flat yield curve
argues against taking maturity
risk. We are emphasizing preferred securities to drive incremental income given our positive view of corporate
health but overall remain
biased toward quality in fixed
income allocations.Looking
ahead, we seek to balance the opportunities presented in a volatile market with the risks associated with the latter
stages of a business cycle. If you have questions
about this information or your
investment portfolio, please contact a member
of the Investment Research Team or your Advisor.
The
information contained herein has been obtained from sources believed to be
reliable, and its accuracy and completeness
is not guaranteed. No representation or warranty, express or implied, is made
as to the fairness, accuracy, completeness
or correctness of the
information and opinions contained herein. The views and other information provided are subject to change without
notice. This site is issued without regard to the specific investment
objectives, financial situation
or particular needs of any specific
recipient and is not to be construed as a solicitation or an offer to buy or sell any securities or related
financial instruments. Past performance is not necessarily a guide to future
results.Historical performance
results for investment indices, benchmarks, and/or categories have been
provided for general informational/comparison
purposes only, and generally do not reflect the deduction of transaction and/or
custodial charges, the
deduction of an investment management fee, nor the impact of taxes, the
incurrence of which would have the
effect of decreasing historical
performance results. It should
not be assumed that your IA Firm account holdings correspond directly to any comparative
indices or categories. Please
Also Note: (1) performance
results do not reflect the
impact of taxes; (2) comparative
benchmarks/indices may be more or less volatile than your IA Firm accounts;
and, (3) a description of each
comparative benchmark/index is available upon request.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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