Mid-Year Market GPS: When it Comes to Stocks, Trade Rules
Which themes are shaping the 2019 investment landscape? Read our investment teams’ thinking in the Janus Henderson Mid-Year Market GPS.
The trade disputes that started between the U.S. and China in 2018, and extended to other regions in 2019, could continue a while longer. George Maris, Co-Head of Equities – Americas, explains why that matters for investors.
- Trade disputes remain the biggest source of uncertainty for the U.S. equity market, in our opinion, and are likely to persist into the second half of 2019.
- Consequently, we believe the Federal Reserve and other major central banks will keep monetary policy accommodative for a while longer, especially if political uncertainty continues.
- Although valuations for some equities climbed during the market’s rally in early 2019, others, including stocks of many financial and energy companies, trailed their peers and now look relatively attractive.
George Maris: Worries about trade war haven’t gone away. We still have to be cautious about this. The worry is that with politicians acting in a manner that’s hard to predict, you want to make sure that the central bank is allowing for a big safety net by keeping rates very, very accommodative. And I think the Fed understands that. The Fed understands that it needs to be cognizant of market and economic fears with respect to the political actors that are out there and that it has to be much more lenient with respect to looser monetary policy than it ordinarily would like to be. I think that’s got to be the mindset for most investors going forward, is that you’re expecting the Fed to be patient and other central banks to be patient about raising rates so long as you see potential for political instability. If you see politics, trade war, etc., settle out in a constructive setting, then you have the ability to see rates raised.
We talk about equities as a whole but they’re really not. So there are areas that have done very, very well. A lot of the Software as a Service names have had fantastic rallies. These are great companies; they have fantastic multi-year outlooks; they’ve rallied very aggressively. But you’ve seen a lot of other stocks that haven’t. So financials are still pretty inexpensive; some of the mining stocks are still relatively inexpensive; even some of the energy stocks, even with the rise in oil prices, haven’t reflected the higher oil prices that seem to be sticking. So there are pockets of opportunity that are out there.
For me, the crux of the matter is how we handle trade. I think that was the issue throughout 2018; that’s why the Fed became so important because you realized that trade could go awry and you needed that safety net. And I think that still persists in 2019. So we need to get to constructive outcomes on the trade negotiation front. I think that’s first and foremost. And then that narrative changes to the politics of 2020 and to see what kind of candidates are going to be fielded and what kind of policies will come to the fore because some of the policies that are being announced are really extreme; that’s a potential caution sign for investors.
Irrespective of whatever your personal politics are, generally speaking investors like certainty. They like to know what the rules of the game are and they can go ahead and allocate capital accordingly. If we’re going to have the rules of the game with respect to the economy and business change dramatically, that creates a lot of turbulence. And I think that’s something to note as we enter and think about 2020 and beyond.