Single year market forecasts are hazardous. In 2017, nearly every asset class delivered a positive return. As we conclude 2018 nearly every asset class is down, including domestic stocks, real estate, alternatives, bonds, and overseas investments. A reversion to the mean in 2019 is likely.
The biggest risk to the market is a possible recession, putting downward pressure on corporate earnings, which will pressure equity prices. Most indicators, including labor demand, wage growth, and confidence give reason for optimism. Yet, economic forecasting is more art than science; from time to time our economy has two quarters in a row of negative GDP growth, the commonly accepted definition of a recession.
Interest rates are key. Investors are uncertain whether they prefer higher or lower rates. The Fed’s stated goal of normalizing (raising) interest rates caused much of the initial October sell off, as Federal Chair Jerome Powell suggested we’ve got many Fed rate hikes ahead.
Fast forward two months, and we have a partial yield inversion, as rates on longer dated bonds have sunk below those of shorter dated bonds, triggering recession concerns. Analysts point out that we’ve never had a recession without a preceding yield inversion. However, not all yield inversions result in recession.
2019 will not be only about interest rates. Tariff negotiations between China and the US weigh heavily. Economists generally agree that a resolution is in the interests of both countries. Issues involving intellectual property protections and better market access will not be resolved quickly, however.
Earnings should follow the economy and be strong. Still, they will undoubtedly decelerate from 2018’s heady growth, which benefited from a newly enacted tax cut.
Stock investors will have to be discriminating in 2019, carefully balancing the outlook versus what seems already reflected in each company’s stock price. Here’s our top five for 2019:
Altria (MO): This legendary tobacco powerhouse sells of half of all cigarettes sold domestically, led by its flagship Marlboro brand. Restrictions on advertising and promotion help the industry giants remain entrenched, as it makes it very difficult for competitors to gain traction.
To offset a hostile marketing environment, Altria has diversified widely. It has investments in wine and beer and in alternative nicotine delivery devices such as chewing tobacco and vaping. Altria has announced it plans buy a stake in Cronos, a marijuana player. Investors seeking a less costly way to play the potential of cannabis may consider MO.
Applied Materials (AMAT): AMAT makes the equipment that makes semiconductors. It has over 30,000 tools and its own personnel installed in virtually all chip makers worldwide, giving it huge exposure. The stock has retreated by a third in the last year over global trade and tariff concerns. We believe this is a severe overreaction and advise taking positions in this outstanding tech franchise.
Citigroup (C): Citigroup distinguishes itself as the most global of the large US banks, with operations in more than 100 countries. The stock has lagged as overseas economies have not been as robust as ours; we believe that’s fully reflected in C’s stock price. Any upturn in Asia and Latin America will work to its benefit.
CVS Healthcare (CVS): CVS is one of largest healthcare services providers. It handles 1.4 billion prescriptions annually, boasts 20 million members of its health insurance program, has one of the biggest mail order businesses and operates nearly 10,000 stores and clinics nationwide. Its recently completed buy of Aetna, one of the largest health insurers, could make it into one of most powerful companies in America. It trades at just 10 times what it’s expected to earn in 2019.
Exxon (XOM): Exxon is arguably the highest quality energy play. What sets it apart is its integration over all facets of energy production, including upstream development and extraction, midstream transport, and downstream refining and marketing. It’s the largest refiner in the world. Its chemical operation, which uses oil and gas as feedstock, is one of the largest on the planet. It’s currently more bullish on the long-term outlook for fossil fuels than are its peers, as it hopes to double its reserves by 2025 and is investing heavily to achieve that goal.
Note: David G. Dietze, JD, CFA, CFP™ is President and Chief Investment Strategist of Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Avenue, Summit.
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