After two years of a bullish economic outlook driving investment decisions, the U.S. Bank Wealth Management team has started 2019 by taking a more balanced approach to its portfolios – more of a “remain patient and assess” stance, said Eric Freedman, Chief Investment Officer, U.S. Bank Wealth Management.
“The time to be more aggressive and more opportunistic in capital markets was in 2017 and 2018,” Freedman said. “There are variables influencing capital markets that are incrementally more difficult to forecast now than they were two years ago.”
The three biggest factors driving markets this year are economic growth, Federal Reserve monetary policy, and U.S.-China relations, and the latter is the most difficult to forecast, he said.
Freedman said economic weakness is becoming more pronounced and is spreading to the United States, Canada and parts of Latin America, which were showing more durability than other parts of the world.
The Federal Reserve, meanwhile, has done an about-face since late 2018, when Chairman Jerome Powell signaled a more restrictive monetary policy when announcing a quarter-point increase to its benchmark rate – its fourth increase of the year. In early January, however, Powell pivoted to a more accommodative stance, saying future rate hikes weren’t set in stone. The Federal Open Market Committee left the rate unchanged at its Jan. 30 meeting.
Finally, all eyes are on U.S. trade negotiations. “As a categorical statement, the biggest near-term issue is what happens with the U.S. and China,” Freedman said. “And that is, without question, the most difficult to forecast.”
All of this means Freedman and his advisers “have to be very intentional of where we think we have an edge or can gain an edge as an investment team,” he said.
Taking a balanced approach for his team is less about the mix of stocks and bonds in a portfolio, but more about taking an analytical approach to sector investment to find specific opportunities.
“Where we have a discernable edge as an analyst team and investors is in data analysis, not headline opportunities,” Freedman said. “We think the more fruitful way of finding value is doing a deep dive within an asset class, such as looking at midstream companies in the energy sector, or structured credit products in fixed income.”
Although equities markets globally posted strong gains in January, based mostly on the Fed’s change in tone on interest rates, the U.S. Bank Wealth Management team retains its balanced outlook on market fundamentals and corporations’ financial strength this year.
“Nothing has changed materially since December,” said Tom Hainlin, global investment strategist at Ascent Private Capital for U.S. Bank. “We still see a world economy that’s growing, but slowing. We can see very clearly in our data that the economy and corporate America are still healthy, but earnings growth is clearly slowing.”
The team continually analyzes more than 700 data points to drive their investment decisions, he said.
“We had a lot of wind at our back in 2017, such as global central banks’ monetary policy, pending tax cuts and synchronized global growth,” Hainlin said. “All of those have moderated. We are one year beyond the tax cuts so those impacts are starting to wane and we are now seeing a global synchronized slowdown.”
“Fixed income investments are designed to provide income and hold balance in portfolios,” Hainlin said. “We think safer Treasury bonds and corporate bonds that are investment grade are a good deal. But we would advise against too much credit risk in areas that act like equities, like high-yield bonds.”
Other areas of interest include structured credit, reinsurance and opportunities with foreign bonds, if currency fluctuations are hedged, he said.
On the flip side, there’s little benefit in buying bonds with longer maturities, Hainlin noted, because the extra yield offered for bonds maturing later is at or near historic lows, offering little incentive for the extra risk.
“In a nutshell, our balanced, data-driven approach means we don’t get whipsawed by the daily moves of the market,” he said. “So, we’re staying close to our long-term allocation of stocks, investing in bonds that provide income and diversification and avoiding the higher risk opportunities.”
Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said 2018 was a rough year for commodities, with oil prices dropping at the end of the year.
“As we look ahead in 2019, we think a lot of the problems the commodities sector faced at the end of the year are still present and are keeping a lid on prices,” he said. “Two things are working together to keep prices down – slowing global growth, meaning lower-than-expected demand across the commodities complex – and a glut of supply. So, for the first part of this year, we think prices are likely to stay about where they are, without a lot of upside or downside.”
U.S. sanctions on Venezuela are giving at least a temporary boost to prices, and the OPEC agreement to limit oil output could also push prices higher, he said.
“The caveat to that would be looking at what’s happening with global growth,” Haworth said. “Those trends are soft, so while inventories may come down, if demand doesn’t go higher, potential price increases are more limited. So, we see oil trading in quiet range in the first half of the year, with second-half prices dependent on global growth.”
Written by Heather Draper of U.S. Bank.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.