- After a volatile December driven by concerns of rising rates, peak economic and earnings growth, and geopolitical tensions, markets have bounced back.
- 4Q18 profit growth is expected to slow relative to what was seen during the rest of 2018 as a result of lower margins, higher input costs, a stronger dollar, and slower global growth.
- The energy, financial, materials and healthcare sectors are expected to deliver strong earnings growth, while the technology and communication services seem to be coming under pressure.
- Small cap equities look most vulnerable to the rise in corporate debt; in the large cap space, certain sectors are more vulnerable than others.
- We maintain a preference for cyclical value – these are sectors that provide income above that of the broad index, which could help enhance returns and dampen volatility in the year ahead.
A December (and January) to remember
As 2018 came to a close, the risk that a late cycle U.S. economy would be short-circuited due to tighter monetary policy and trade uncertainty began to build. For investors, this translated into a concern that 2019 earnings growth would slow more than expected. Market volatility ensued and the S&P 500 dropped -19.8%, narrowly avoiding what would technically be considered a bear market.
Since then, and even despite the U.S. government being shut down for the better part of January, markets have come roaring back, with the S&P 500 up 15.2% from its December lows and 8.0% year-to-date. Even the average stock has been acting better, as evidenced by the outperformance of the equal-weighted index relative to the market cap weighted benchmark (Exhibit 1).