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Investment Outlook 2019

While stock volatility entering 2019 reminded investors of the importance of balance, investment fundamentals – corporate earnings, interest rates and valuations – suggest they have much to look forward to in the year ahead. Brian Kilb and Kyle Tetting talk about prospects for the year ahead in a Money Talk Video. A transcript of their discussion follows.

Brian Kilb: Kyle, the fourth quarter gave us another opportunity to remind people why it’s so important to build balanced portfolios. If you look through the first three quarters of the year, stocks were doing pretty well. Bonds not so much. They had a really difficult period, especially in January and February.

But lo and behold, as volatility returned and stocks went south, your bond market came to the rescue, gave you some stability in your portfolio and hopefully will help you get through these volatile times.

Kyle:  I feel like we say balance so often as this reminder to investors that that’s the piece that carries them through these kind of markets, and it’s important to remember that we just about touched a bear market in 2018. It continues to paint a picture for investors to remember that role, as you say, that balance plays.

Brian: I think it’s tough for investors to kind of reconcile a couple different things that happened last year. First, corporate earnings have been so strong – up give-or-take 23% last year – and yet, hey wait a minute, stocks lost 5% on the year, if you look at the S&P 500.

The market is a forward-looking mechanism, right? So the market was anticipating some of these problems we’ve had. All the talk about trade with China and tariffs, some concerns about the Fed and a number of other issues that have led people to worry whether a recession isn’t out there somewhere.

And yet, here we are with cheaper valuations now, maybe a little more opportunity for people to buy than what we saw months ago.

Kyle: Brian, I think that valuation piece is maybe key right now. So often, we talk about earnings and interest rates, and we have to give you credit for your talk at our latest seminar about the valuation piece as well.

And moving from well over 17 times price-to-earnings multiple on forward earnings for the S&P 500. You know, that was at the end of the third quarter. You look now at less than 14.5 times the next 12-month earnings on the S&P 500. That’s cheap relative to historical averages.

And so, I think investors have this opportunity to get into something maybe at a lower cost than what they’ve seen in the past. And, of course, that doesn’t mean that the other issues we’re talking about aren’t still issues, but I think it’s an opportunity.

Brian: You talk about the Fed and expectations for continued rate increases. It wasn’t too long ago that we were expecting four rate increases in 2019. That pretty quickly became two, and now there’s some discussion that there may not be any rate increases. So, while the Fed had mapped out a course, that certainly changed and should give some comfort to those folks that thought the Fed was maybe getting a little ahead of itself.

Kyle:  Absolutely, and I think it all comes down to the economic data that continues to come out as fairly positive but not so positive that inflation has been an issue. And the Fed’s real issue right now is what happens if inflation takes off, and that’s just not a real concern for us at this point in time.

We’re finally starting to see a little bit of wage growth, and yet we’re just not seeing inflation materialize in the way that so many have predicted for so long. And so, I think that’s one of the things that’s keeping rates in check as we look to expectations for 2019.

Brian: Well that is kind of an unusual situation, Kyle, that you don’t have much inflation out there. But the consumer continues to spend, and now corporate America’s jumping on board as well. Increases in research and development spending, increases in capital expenditures. You know, if the consumer and corporate America keeps doing its job, it’s hard to see a significant recession ahead.

Kyle:  We know that a recession is going to come at some point in time, but to say specifically when that happens, you know, that’s a very difficult thing. And yet, that 60/40 portfolio allows you to participate in the stock side with the things that we know are doing well right now, with the employment picture, with wage growth, with all of those things that are the positives, but it’s the bond piece that gives you that protection.

And with little expectation that the Fed’s going to move too quickly here, with little expectation that rates are going to be a real issue and yet getting the benefit of the recent increases that we’ve seen in interest rates, I think that the bond piece is as important as ever.

Brian: Well, and I think it’s a pretty good time to plug dividend-paying stocks as well. You know, I think dividends, on average, are roughly 85% of the 10-year Treasury rate right now. So you get stocks, you get a little more volatility, but you get a little bit of income. And because valuations are reasonable right now, you get the upside potentially of stocks as well.

Kyle:  I think it’s so important that investors paint that total return picture, not just how much are my stocks up, in terms of price, but you add in that greater than 2% dividend yield on the S&P 500 right now. You know, that’s a meaningful number for investors that are just looking for a little bit of cash from their portfolio or for those investors just looking to reinvest it to continue to grow. Dividends are an important piece to remember.

Brian: Well, just a reminder, as the market anticipates some difficulties, the market also anticipates getting through those difficulties. And certainly, in the midst of what are some challenging times for stocks, as we look ahead and get past some of these difficulties, we may find ourselves a little more optimistic down the road.

Learn more
The Importance of Balance for Investors, a Money Talk Video
Valuations: What stocks are worth, a Money Talk Video with Brian Kilb
Retaining value in your stock portfolio, a Money Talk Video with Marc Amateis
Total return: Your full investment picture, a Money Talk Video with Paige Radke

Brian Kilb is senior vice president and an investment advisor at Landaas & Company.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
Money Talk Video by Peter May and Jason Scuglik

(initially posted January 18, 2019)

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