We anticipate bumpy times for equities in 2019. A combination of economic, geopolitical and policy factors have already reduced price/earnings multiples by near record amounts. We have dialed down risk in 2018 and will likely continue to do so in 2019 as we expect global growth to slow. However, the expected volatility could cause dislocations that are not fundamentally driven, resulting in tactical opportunities to consider.
We have lowered earnings expectations globally due to more subdued revenue and margin assumptions. We believe investors will be confronted by increased volatility amid slower global economic growth, trade tensions and changing Federal Reserve policy. Our base case relies on the view that the U.S. may enter a recession in 2020. As the market dropped 9% in December, the worst market return in any 4th quarter post World War II, many risks are starting to be discounted by the market. We have reduced industrials, basic materials and financials due to heightened risks.
There are a number of factors that are driving this view, but it is important to note that risks to the upside do exist:
Don’t “run for the hills”, but do be prudent. In uncertain markets like these, we look to do three things: reduce risk, focus on high quality and stay alert for opportunities due to dislocations.
Still, in this climate, the bottom line is that you should be increasingly mindful of risk in your portfolio so that you can reach your long-term investment goals. For more information, we encourage you to reach out to your advisor.
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