Stay Invested, Be Vigilant

by: , CIO, New York Life Investment Management

2018 was a year of divergence. Economic and business performance were robust. Global growth was above trend and the U.S. economy outperformed. Earnings growth, boosted by tax reform, was high. Fiscal stimulus in the U.S. supported strong consumer and business activity.

But these solid economic fundamentals were met with poor market performance, particularly in the fourth quarter.

What Happened Last Year?

The elephant in the room is volatility. Volatility did increase from cyclical lows in 2017 to a “standard” level of volatility in 2018. However, the real surprise was not volatility itself but the climactic, liquidity-driven drawdown into December.

S&P 500 Price Action

Sources: New York Life Investments; Bloomberg; S&P; data as of 12/18/2018

If economic growth is so robust, why are we seeing this level of drawdown? To begin, earnings and economic growth are indeed growing, but they have likely peaked. In this environment, investors tend to be skittish and overreact to news headlines and data releases.

The dynamic is exacerbated by the build-up of geopolitical risk and political uncertainty, making it difficult for businesses and investors to make concrete plans.

Finally, with the highly anticipated unwind of quantitative easing in the U.S., liquidity is becoming an issue. The Fed has become a net seller of securities, without any natural buyers. Add it all together and you have a negative market dynamic despite strong economic fundamentals.

Looking Ahead: Bases Are Loaded

With all the pessimism, it is important for investors to note that volatility goes both ways. With drawdowns at the end of 2018, we see less likelihood of heavy downside volatility, and opportunity for capturing upside.

Four factors contribute to potential upside this year. In an optimistic scenario, these four factors could have loaded the bases for a market grand slam.

First base: Real interest rates are near zero.

Second base: Sentiment is protracted, meaning a lot of cash is on hand. The American Association of Individual Investors found that 50% of investors are bearish, the most since 2013.

Third base: Valuations are low. Forward price/earnings ratios on the S&P 500 are low relative to their historical averages, and global markets are even cheaper. Unless we expected recession – which we don’t – this indicates room for multiple expansion.

Grand Slam: The Federal Reserve is moving towards a more dovish posture, removing one of the key risks that weighed on sentiment in 2018. As investor fears on this and some key geopolitical risks alleviate, we could be looking at a double-digit market return for U.S. equity this year.

Financial Markets in 2019

The prolonged bull market may have paused to rest, but it is far from exhausted. Both fundamentals and valuations provide a good backdrop for risk assets in 2019.

Stay invested. The economic expansion remains on track. After significant drawdowns in 2018 we believe that there are opportunities across asset classes, and we are working with our investors to identify good positioning and solutions. In our portfolios, we prefer equities, with a few careful plays in fixed income. The idea is to maintain the risk-on stance of our portfolios but consider diversification and resilience in this late-cycle environment.

Looking for More Market Insights?

Download Our Full 2019 Economic Outlook

About Risk

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The S&P 500 Index is widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Jae Yoon

CIO, New York Life Investment Management

Jae Yoon is the Chief Investment Officer (CIO) of New York Life Investment Management (NYLIM). He is responsible for the ongoing evaluation of the investment performance of the strategies managed by NYLIM’s boutiques and affiliate portfolio teams.

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