What will support equity markets in the months ahead?
Well, first of all, we're in the midst of a midterm election year. They are historically sloppy years, And you generally make all your money in the fourth quarter of the year after the uncertainty is gone. So, this kind of sideways pattern we've been going through is not unusual, but it's in the midst of Earnings growth, which has been really very good. Consequently, the valuation of the market, the price we pay for each dollar of earnings has been coming down. What could power this market going forward here would be two things. One, earnings and that that valuation number goes up. Earnings look good and the valuation number can go up if the market decides that inflation is not a problem, and that it will keep the Fed at bay.
How can investors position for higher growth, volatility and inflation?
Yes, well we have been saying here at Federated Investors that we thought the two percent growth in our economy, that we'd been experiencing for the last nine years would move up to three percent for at least 2018 and 2019 to the extent that this is right we continue ongoing with the three percent growth in our economy. Next year this country will come into and match the longest economic recovery period that it has ever had. So, to the extent that you agree with Federated Investors, that this economy continues to grow, you buy the cyclical sectors of the economy, the sectors that continue to benefit from the growth of the economy. If inflation grows, financials of all sectors do love inflation and that is one of the areas of the economy that we at Federated are overweight, but if volatility grows, if we continue to see volatility as a problem, that could get investors more skittish and that could send them towards some of the more defensive areas of the market that have been beaten up of late.
What sectors are likely to outperform?
We at Federated do believe that we will find this to be the longest economic recovery in the history of our land. We like cyclical sectors, we like energy stocks, industrials, and financials. Interestingly, industrials and financials, because of the uncertainty in recent months, have given back all their outperformance versus the market since the election occurred and we first started thinking cyclical growth. That argues that some of these sectors that we like are actually reasonably inexpensive right now.
Are trade conflicts a threat to the equity markets?
Well, the trade conflicts are a source of uncertainty, and the markets don't like that, so we are watching to see how they will play out. You have the two largest economies in the whole wide world, the United States and China, going at it back and forth. If the two largest economies in the whole world should decide to do a real legitimate trade war, you're very likely to have a global economic recession. Stocks don't like a recession at all. It is very important for us to watch because globalization has helped our country, actually the whole world, achieve record profit margin. It's been great for consumers and the price we pay for goods. To the extent that, that would get harmed by cutting the supply prices from China, raising the prices in the United States, bad news for inflation, bad news for earnings. We'll have to wait and see.
Views are as of June 25, 2018 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. Federated Equity Management Company of Pennsylvania 10-74996 (6/18)