Areas poised for growth in 2019
Which areas of the market are poised for growth this year? Portfolio Manager Steve Chiavarone breaks it down by asset class.
Published February 12 2019
Views as of 2-06-2019 and are subject to change based on market conditions and other factors.
I'm Steve Chiavarone, a Portfolio Manager of Federated Investors.
Do you think we're headed for a recession in 2019?
We do not think we're headed for a recession in 2019. The market was extremely concerned about this in Q4 of 2018 which is why you saw markets drop as much as they did. However, we looked at a consistent reliable set of forward looking recession indicators. These span labor markets, inflation, housing, manufacturing, credit markets, and the yield curve. Not a single one of those indicators came anywhere close to flashing high recession risk. In fact, when you look at where they are today, they suggest that the earliest we should really be considering recession is late 2020, early 21. Now, there's a lot of things that can change, in the meantime a lot of variables that can impact that. But what it tells us is that the risk of recession that the market was pricing in was too high. And what were more likely looking at is a non-recessionary pull back, which are these period where the market falls 15, 20, even 30%. But the economy is not on the verge of a recession. When you've had those and there's been 12 of those instances over the last 90 years, The market has moved higher over the next 12 months, a hundred percent of the time to an average amount of about 30%, which is consistent with where we think the market is gonna go over the next 12 months.
Which areas of the market are poised for growth this year?
As we looked at what areas are best place for growth, let's take it asset class by asset class. On the equity side, there's three areas that we find attractive. The first one is cyclicals. So these are parts of the market that require economic growth in order to do well. They were down 25 to 30% during Q4 of 2018 because they were pricing in a recession and we don't think that is going to happen so we think there's a lot of relief to come. These are areas like energy, industrials, materials, financials, parts of discretionary, and tech. The second area is the dividend payers. So, dividend payers were being priced for one rate hike a quarter from the Federal Reserve between now and the end of time. And we don't think that is going to happen. We think that there are gonna be a much more patient Fed. And so we think there's relief in those names which are very interest rate sensitive. The third area is small-caps. Small-caps, half of their funding is variable rate. So when rates are rising, that puts pressure on these companies. We've seen rates come down a little bit, that provide some relief. And the fixed income side, credit. We saw a blow out in credit spread, or at least to pick up in credit spreads during the 4th quarter of last year. As folks became more concerned about the economy, we think because we're not headed in for a recession, you can see some compression in those spreads and so there is some opportunities in high yield in investment grade credit. And then finally on the multi-asset side, you're up against the backdrop of really disappointing alternative results. And what we think there's an opportunity for, in fact the real opportunity is for a good tactical multi-asset strategy that can be able to provide upside participation as the markets move higher but shift towards more defensive positioning and provides some downside protection through volatility.
Views are as of February 6, 2019, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Investments are subject to risk and fluctuate in value. The value of equity securities will rise and fall. These fluctuations could be a sustained trend or a drastic movement. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Sources for recessions/market information in response to question one is Bloomberg and Federated Investors as of December 31, 2018. There is no guarantee that dividend-paying stocks will continue to pay dividends. Small company stocks may be less liquid and subject to greater price volatility than large company stocks. Federated Global Investment Management Corp. 19- 10025 (2/19)