Investors may wonder what to expect as we move into 2019. Audrey Kaplan, Head of Global Equity Strategy for Wells Fargo Investment Institute (WFII), shares some insights gathered by WFII’s team of strategists.
1. The U.S. market: Slower earnings growth
The big question on most investors’ minds is, “Will the 10-year bull market come to an end?” The good news is that Kaplan and her WFII colleagues don’t expect it to end in 2019.
Corporate earnings are expected to grow in 2019, but more modestly. “Earnings growth probably won’t be as strong as it was in 2018, but it will still be solid, and we expect to hit record high earnings-per-share for 2019,” Kaplan says. WFII expects average corporate earnings per share to be in the 9-to-10-percent range. Corporate tax cuts were a historic boost for businesses in 2018, but that was a one-time earnings stimulus, which will not repeat in 2019.
Investors’ takeaway: Hold steady with your long-term investment plan, advises Kaplan. You still may earn attractive stock returns in 2019—they just may not be quite as generous as they were in recent years.
2. Market sectors: What’s up, what’s down
WFII’s two “most favored” market sectors for 2019 are Industrial and Financial.
- WFII expects the industrial sector to do well in 2019. Corporations are likely to use their 2018 tax savings to update production facilities, buy new equipment, and make other purchases. When that happens, explains Kaplan, industrial firms tend to benefit: They build and sell the equipment that companies buy for their factories and offices. And they make and sell large trucks, transportation services (including railroads), and military supplies.
- The financial sector is expected to do well, also. Some reasons: Interest rates are rising, loan demand is increasing, and the regulatory environment for financial companies is easing. These factors may help make financial companies more profitable.
On the other hand, WFII ranks the utilities and real estate sectors as “most unfavorable” and “unfavorable” respectively for 2019.
- The utilities sector: According to Kaplan, dividend-paying utility stocks are likely to fall from favor as less risky, fixed-income investment returns rise.
- The real estate sector: Commercial and residential real estate sector stocks are very sensitive to rising interest rates, explains Kaplan. Historically, rising rates and an aging economic cycle lead to underperformance for this sector. Those two factors will be in effect for 2019.
Investors’ takeaway: Review your portfolio’s sector allocation with your wealth team to determine if your current balance aligns with your goals.
3. Global diversification: More important than ever
Even if the U.S. stock market slows down, global markets won’t necessarily do the same; international diversification can help investors find growth for 2019.
WFII particularly favors the emerging markets of Asia, including China, India, and South Korea. “These countries are introducing numerous economic stimulus measures that may expand their markets,” Kaplan says.
Many international stocks are also selling at lower-than-average prices right now relative to U.S. stocks.
Investors’ takeaway: Ask your investment professional whether your portfolio might benefit from a larger percentage of international stocks—particularly those connected to emerging markets.
4. Interest rates and wage increases: Slow but steady is best
WFII appreciates the Federal Reserve’s restrained “quarter point per quarter” interest rate increase. “However, if interest rates start rising too fast, or we start to see inflation overheating, that could choke off U.S. economic growth,” Kaplan says. As such, WFII will continue watching for interest rate red flags.
Employee compensation/wage growth is another area in which slow, steady increases are key to economic stability, says Kaplan.
“Unemployment rates are now so low that companies are offering better salaries and benefits to attract workers. According to the Atlanta Fed Wage Growth Tracker Overall, wages as of October 31, 2018, were at their highest point since November 2016,” she says. That’s a good thing for employees, but wages are a huge portion of corporate expenses. If U.S. wages rise too rapidly, corporations will likely respond by slowing expansion.
Investors’ takeaway: Changes to interest rates and wages are worth watching. You should plan to check in with your investment professional throughout the year to stay up to date on these issues.
5. Increased volatility: Maintain your long-term focus
“Our message for investors in 2019 is this: The economic shifts described here are very common and expected,” Kaplan says. “We do expect overall financial volatility to increase, but that’s very typical later in an economic cycle—and we’re now more than nine and a half years into the current cycle.”
In other words, if you’re a long-term investor, you have enough time to weather these ongoing, short-term shifts.
For more insights about what to expect in 2019: Read the 2019 Outlook report from Wells Fargo Investment Institute, “The End of Easy.”