What Keeps Us Up at Night?

by: , Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management; Robert Serenbetz, Portfolio Strategist, New York Life Investment Management

Our 2019 outlook is holding up well so far this year. The S&P 500 is up 16% over December lows. The U.S. Federal Reserve (Fed) has signaled it will slow – or even stop – its pace of rate hikes. Investor concern over key geopolitical risks such as trade wars is waning.

Where do we go from here? Strong economic and earnings growth give us room to run throughout 2019, particularly in equity markets. That said, volatility has declined for 7 consecutive weeks, which has only happened two other times in history – with mixed results for markets. Given we are late in the economic cycle, it is natural for investors to be concerned in this environment. Things are going well so far this year, and they may be waiting for the other shoe to drop.

There are always risks to market performance, and always reasons to take money off the table. Despite several risks, we think there is reason to be optimistic about risk assets. However, that view rests on the assumption that three key risks will not materialize:

Risk 1: The Fed

Strong employment conditions and above-average economic growth contributed to the Fed raising interest rates four times last year. Substantial market volatility ensued, showing us that even if the economy could handle higher interest rates, financial markets could not.

The Fed has heard that message as well. In its January meeting, the central bank indicated that it would slow its pace of rate hikes. This is consistent with our 2019 outlook, and positive for risk assets.

However, if prices and wages start to grow more rapidly or the economy shows signs of overheating, the Fed could be prompted back to action. Volatility would likely accompany new Fed activity.

Risk 2: China’s Slowdown

Trade will continue to grab news headlines. That said, we saw both U.S. and Chinese leaders flinch at the market drawdowns in Q4 2018. We think that we will get some compromise on trade this year, taking extreme tail risk off the table.

However, China’s economic trajectory presents a broader risk. China is the world’s second largest economy and an important driver of both emerging markets and commodities performance. In 2018, business confidence in China deteriorated. This dynamic can be worrisome for financial markets; it warns of a downtick in global demand and increasing financial market volatility, especially for emerging markets.

We think lower-trending growth has already been priced into markets and creates opportunities for upside. China has monetary and fiscal policy tools it can use to support the economy. That said, if economic growth deteriorates more than expected, we would expect a negative market reaction.

Risk 3: Liquidity-Driven Drawdowns

This risk is a short-term technical story, mirroring the events of Q4 2018. If there is a liquidity-driven selloff in both equities and credit, we could see a breakdown in asset prices before we get a strong catalyst to buy. This risk is difficult to plan for. We will be monitoring any downside volatility closely for signs that it could occur.

Takeaways For Investors

None of these risks are in our base case scenario for 2019, but they are the most important ones. We will be monitoring closely for indications that these risks become more likely. Regardless of how they unfold, we expect volatility to prevail throughout the year. Investors should remember to stay focused on their long-term investment goals, and consider making their portfolios more resilient to volatility.

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.

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.

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Lauren Goodwin, CFA

Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management

Lauren Goodwin, CFA is an economist and multi-asset portfolio strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group, which has $10B in assets under management. She joined NYLIM in 2018 to focus on global macroeconomic trends

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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