Top 10 Investment Themes for 2019

Investment Themes for 2019

Let me start by saying that we, at Hennion & Walsh, wish everyone a happy and healthy New Year. Secondly, as we turn the page from 2018 to 2019, below are 10 investment themes that we expect to be influencers of market performance, and therefore in the mindsets of investors, in the New Year.

1. Quality Shines Through – as economic and earnings growth are both expected to slow in 2019, we believe that quality, financially healthy, U.S. companies are more likely to weather additional bouts of anticipated volatility. These companies could also potentially deliver positive returns in what is likely to be a challenging investment environment. In this context, we view quality and financially healthy companies as those that have: a) strong balance sheet attributes, b) earnings sustainability, c) distinguishing characteristics or a competitive advantage from their peers and d) pay an attractive dividend.

2. Diversification Matters as Days of Volatility are not behind us – while we believe that the market was oversold during the final quarter of 2018, resulting in certain attractive investment opportunities for 2019, investors should not be lulled into a false sense of comfort that the days of volatility are behind us. Certain headwinds related to trade negotiations, Federal Reserve activity, recessionary indicators and drama in Washington DC will likely continue to surface throughout the year and induce more unsettling market volatility. With this said, investors should be hesitant abandoning equities altogether over fears of an upcoming economic recession or the ending of a bull market cycle. Based on our research, equity performance has been quite strong in the late stages of a bull market cycle. Consider this, historically a recession does not begin until 20 months after the onset of a yield curve inversion on average and equity markets averaged a 19% growth rate over that time frame. Fixed income products and strategies, as well as certain commodities such as Gold, can also help provide diversification potential to a portfolio strategy.

3. U.S. Fundamentals Remain Strong – economic fundamentals in the U.S. strengthened in 2018 and we expect them to remain relatively solid in 2019. This solid economic base, accompanied by a more dovish Federal Reserve, should create a constructive environment for stocks to start out the year. As the year progresses, the outlook for the rate of earnings and economic growth starts to weaken. Given this multi-pronged outlook, companies that are well-run and have strong investment merits should help provide total return potential throughout the year. In this regard, we believe that how a company scores from an environmental, social and governance (ESG) standpoint should be considered when looking to identify stock opportunities associated with stable, well-run companies.

4. Rate of Earnings Growth Slows but Earnings Continue to Grow – according to FactSet, for the fourth quarter of 2018, the estimated earnings growth rate for the S&P 500 Index is 12.4%. While this earnings growth rate is below that of the second and third quarter of 2018, which both registered actual growth rates above 20%, it still represents solid earnings growth and would mark the fifth straight quarter of double-digit earnings growth for the index if the forecast proves accurate. Looking ahead to 2019, FactSet estimates earnings growth for calendar year 2019 at 7.9%, compared to an estimate of 20.3% for the calendar year 2018. This represents a solid, but reduced, earnings growth outlook for the New Year and companies that have a history of earnings growth should fare well.

5. Emerging Market Equities Rebound – international equities lagged U.S. equities in 2018 but remain an important part of a globally diversified portfolio within an increasingly interconnected global economy. Looking ahead to 2019 and beyond, we believe that emerging market equities, which were suppressed in 2018 due to concerns over potential, protracted trade wars between the likes of U.S. and China, may start to outperform all developed markets, including the U.S.. As we see it, emerging market equities have attractive valuations, favorable demographics, an increasing pace of technology adoption and the potential to rally following a trade deal between the U.S. and China – which we believe is likely in 2019. Moreover, the U.S. dollar should face headwinds throughout 2019 and 2020 and these headwinds could lead to relative outperformance for emerging market stocks.

6. Increase in Demand for Income Alternatives – with the Federal Reserve now leaning more dovish for 2019, and the yield on the 10-year U.S. Treasury hovering around 2.75% as 2019 begins, investors will be challenged, once again, to find attractive yield-based alternatives in the New Year. Municipal bonds, and municipal closed-ends funds (CEFs) in particular, may provide for attractive yield alternatives for tax-sensitive investors given supply/demand imbalances, cyclical factors related to year-end tax loss selling and the deep discount levels relative to their respective net asset values (NAVs) which exist for many municipal closed-end funds. With respect to the latter, the current average premium/discount for all US-traded national municipal closed-end funds as of December 26, 2018, according to Wells Fargo Investment Institute, was -10.4% versus a 10-year mean average/discount of -3.4%. Additionally, according to an Aaron Weitzman article from The Bond Buyer on December 27, 2018, “Municipal bonds outperformed other asset classes in 2018 and it looks like the trend will continue into the New Year.” Preferred securities also appear to be an attractive income alternative for investment consideration given their high stated dividend payout and current discount levels relative to their respective par amounts.

7. Potential Infrastructure Spending Bill – while the political discourse in Washington DC is likely to further weaken in 2019 as we start to edge closer to the 2020 U.S. Presidential election cycle, we believe that an infrastructure spending bill may be the only piece of “major” legislation that is passed given the divided Congress resulting from the 2018 mid-term elections. If a spending bill does come to fruition in 2019, certain asset classes such as municipal bonds and equities, and within equities, certain sectors such as energy, materials and industrials, stand to benefit.

8. M&A Activity in Select Sectors and Market Caps – the drawdowns in equity valuations that took place over the course of the final three months of 2018 have created attractive potential mergers and acquisitions (M&A) opportunities. From a market capitalization standpoint, companies with larger capitalizations, and free cash available to spend on their balance sheets, may look to acquire companies with smaller capitalizations that have solid balance sheets and a demonstrated history of growing their earnings. From a sector standpoint, the biotech sector was hit particularly hard during this drawdown period and big pharmaceutical companies and/or larger cap biotech companies may now look to acquire smaller cap biotech companies that have drugs progressing through the FDA approval process. These innovative companies can help add revenue potential to combat falling drug prices, compressed profit margins and drug patent expirations that their larger counterparts may be experiencing.

9. Strong Consumer Leads to More E-Commerce Growth – according to Mastercard SpendingPulse, U.S. retail sales increased by 5.1% between November 1, 2018 and December 24, 2018 to more than $850 billion, marking the best holiday shopping season in six years. In addition, online shopping on Cyber Monday rose by over 19% compared to last year, setting an all-time record. Both of these statistics provide evidence of a strong consumer that is confident spending. Given that 70% of U.S. gross domestic product (GDP) is comprised of consumer spending, this bodes well for the U.S. economy. It also bodes well for the continued growth of online sales and those companies that derive a significant part of their overall revenues from their position in the E-Commerce ecosystem.

10. Economic Growth Slows but Risk of Recession is Low in 2019 – the Cleveland Fed’s recession indicator, which measures the chances of an economic decline over the next 12 months, currently stands at 20%. Put differently, this indicator suggests that there is 80% likelihood that there will not be a recession in the next year. While it is likely that economic growth will slow in 2019, an economic slowdown does not necessarily mean recession. We believe that companies that will likely continue to grow in the face of an economic slowdown, which may ultimately lead to an economic recession down the road, include those that are both innovators and disruptors. These companies often embrace technology to adjust to changing economic conditions by either bringing new products or service offerings to market or refining existing products or service offerings.


Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.