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Searching for Growth in 2019's Uncertain Markets

January 30, 2019

“THERE’S GRIDLOCK IN WASHINGTON. China’s economy is slowing, and its trade dispute with the U.S. may take a while to resolve. Not to mention worries about Brexit and slower growth in Europe.

It feels like there’s a lot of uncertainty right now,” says Marci McGregor, senior investment strategist, Bank of America Global Wealth and Investment Management. On the other hand, she adds, the U.S. economy remains resilient. “Consumer confidence and employment numbers are both important—and those have been very strong.”

 

What’s an investor to make of all this? We asked McGregor to share her insights on how to navigate this year’s shifting markets and where the investment opportunities might be amid continuing volatility.

Searching for Growth in 2019's Uncertain Markets

 

Q: How could a slowing economy affect the markets in 2019?
A: "Many people seem to believe the U.S. is about to turn the corner to recession. We don’t think that’s the case. While we see signs that the economy is slowing, our view is that the economy is continuing to grow above historic trends and should expand by about 2.5% in 2019. Once we get data confirming that over the coming weeks and months, it should help to reassure investors. As for corporate earnings, in the first three quarters of 2018, they were up more than 20%. We do expect them to slow to growth of 5% to 6% in 2019. But in recent weeks the market has been pricing in no earnings growth for the year ahead—and that could make equities more attractive to investors."

 

This is a time to increase quality. In equities, that could mean owning more large-cap stocks and U.S. stocks. In fixed income, it could mean taking less credit risk and shifting toward shorter durations. —Marci McGregor, senior investment strategist, Bank of America Global Wealth and Investment Management

Q: Where should investors consider looking within the equity market?
A: "This is a time to increase quality.  That could mean owning more large-cap stocks and U.S. stocks, which are our preference right now. It may also involve buying companies that can grow their dividends.1 Sector-wise, we still like technology, health care and some areas of industrials.2"

 

Q: Coming off of four interest rate hikes in 2018, what can investors do on the fixed-income side of their portfolios?
A: "Here, too, it’s a time to increase quality.  In fixed income, it could mean taking less credit risk and maybe shifting toward shorter durations. We prefer an emphasis on short-dated investment-grade corporate bonds, as well as municipal bonds3 in a range of maturities."

 

Q: Where might investors look for international opportunities?
A: "With more than half of the global population now considered middle-class, there’s a very strong consumer story in emerging markets.4 At the same time, market sentiment has been very negative—which makes emerging market valuations quite attractive. This could be a great opportunity for patient investors."

 

Q: As investors wait for corporate earnings and other data that could stabilize the markets, is there anything they should be doing to deal with ongoing volatility?
A: "The most important thing is to remember your goals. In down markets as well as up, it’s important to have the discipline to stick to your long-term strategy. That can be hard to do when markets are weak, as they have been lately. But markets like these can create really attractive opportunities if you have a longer-term outlook.

 

"Before you alter your investment strategy in any way, though, it’s a good idea to speak with your financial advisor. She or he can help you understand how our outlook for 2019 might apply to your situation, taking into account both your risk preferences and the time you have to potentially achieve your long-term goals."

 

For more insights on the markets and the economy in 2019, visit ml.com/outlook.

 

1Companies may reduce or eliminate dividend payment to shareholders. Historically, dividends make up a large percentage of stocks’ total return.

2Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks.

3Return of principal is not guaranteed. Bond funds have the same interest rate, inflation, and credit risks that are associated with the underlying bonds owned by the fund. Generally, the value of bond funds rises when prevailing interest rates fall and falls when interest rates rise. There are ongoing fees and expenses associated with owning shares of bond funds.

Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.

Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax (AMT).

4International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments.

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

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