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Market Update

Anthony Saglimbene, Ameriprise Global Market Strategist

As of January 2019

Looking back

  • Stocks suffered their worst year since the financial crisis, as volatility spiked in the fourth quarter.
  • Most major asset categories finished 2018 in the red.
  • Cash outperformed most of the world’s major stock indexes.   

Up ahead

  • Corporate profits, trade, and interest rates are the factors to watch in 2019.
  • If the current economic expansion extends to the summer, it will become the longest on record.    
  • Investors should focus on high-quality assets and maintain a diversified portfolio.

Data Source: FactSet

Starting out with more of the same in 2019

The challenges that tripped up U.S. markets late in 2018 continue to be the most significant stumbling blocks as we enter 2019. Decelerating economic growth, trade disputes, tariffs, and interest rate concerns all pose headwinds for investors in the new year. Stocks are coming off their worst performance since the financial crisis (2008) and finished in negative territory for the first time since 2015. However, this has made U.S. stocks more attractively valued, in our view. That said, we see a range of possible scenarios that could challenge markets in 2019. Considering the current environment, investors should remain flexible to changing circumstances and expect volatility to continue.

Markets are focused on three key areas

1. U.S. Earnings

The combination of rising interest rates, stable, but modestly reduced global demand and the fading effects of corporate tax reform could lead to a downshift in corporate earnings this year. We expect that unfavorable comparisons to the previous year’s results, inflation pressures, and tariffs could sap momentum from sales and earnings trends.

Analysts cut their 2019 earnings per share (EPS) estimates for more than half the companies in the S&P 500 during December 2018, according to the financial data firm FactSet. This marks the largest number of estimated EPS cuts in two years. We believe investors are now pricing in a rather flat earnings growth environment for this year, which has added to recent selling pressure in the stock market.

However, we believe full-year profits for S&P 500® Index companies could grow by mid-single digits and just slightly below the Index’s long-term average. If companies can meet this objective, we believe stock prices could trend higher since current valuations look more attractive.

2. Trade

It is difficult to anticipate all the direct and indirect effects that U.S./China trade tensions could exert on economic and corporate fundamentals in 2019. We believe slower-than-expected manufacturing activity last month in both countries, along with declining asset prices, reflect growing trade frictions.

Improved relations between the U.S. and China could give markets a lift, but further deterioration seems just as likely and could turn markets negative again. Currently, the U.S. and China remain far apart in resolving their disagreements, and investors will want to see progress on this front before stocks are likely to meaningfully move higher from here.

3. Interest Rates

The Federal Reserve could hike the fed funds rate two times this year, exerting continued pressure on yields and fixed income investments. Nevertheless, slowing global economic growth and recent Fed comments indicting that further rate hikes may be limited have quickly changed investors views on the rate environment for this year.

As of this writing, fed fund futures are assuming a high probability that the Fed will end 2019 with rates at or below current levels. This is a dramatic turn of events compared to November last year, when futures trading priced in a 90% probability that rates would be higher at the end of 2019.

In our view, the Fed’s policy path remains difficult to predict given the uncertainties of trade negotiations. However, investors’ changing attitudes about what they expect from monetary policymakers this year certainly reflect the negative sentiment of recent weeks.

What does all this mean for your portfolio?

Given the current environment and themes discussed above, investors should ensure their portfolios are focused on high-quality assets. We believe trade tensions and interest rates are the largest threats to global economic momentum and markets this year. If these threats are resolved positively, asset prices will be well positioned to move higher. Yet, if both factors continue to challenge markets, asset prices could see a difficult road ahead. Investors should ensure their allocations are consistent with their longer-term risk profile. A disciplined portfolio approach, led by forward-looking guidance starts with taking proactive steps today to prepare for the uncertainty of tomorrow.

Be sure to talk to your Ameriprise advisor to discuss your current portfolio mix and determine if any changes are needed to help you continue to make progress toward your goals.


The numbers

As of January 9, 2019

Data source: Morningstar Direct

S&P sector returns YTD

Standard & Poor’s (S&P) 500 Index

The S&P 500 is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall U.S. equity market. Over 70% of all U.S. equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.

Dow Jones Industrial Average 
The Dow Jones Industrial Average (The Dow), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

Russell 2000 Index 
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. As of June 2, 2014.

MSCI Europe Ex UK
The MSCI Europe ex UK Index captures large and mid cap representation across 14 Developed Markets (DM) countries in Europe. With 337 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the UK.

MSCI United Kingdom
The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. With 109 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.

MSCI Emerging Markets Index
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. As of June 2, 2014.

Bloomberg Barclays US Aggregate Bond Index (Abbreviated as Bloomberg US Agg in table)
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Commodity Index
Formerly known as the Dow Jones UBS Commodity Index. The Bloomberg Commodity Index is calculated on an excess return basis and composed of futures contracts on 22 physical commodities. It reflects the return of underlying commodity futures price movements.

Dow Jones U.S. Select REIT Index
The Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

Indexes are unmanaged and are not available for direct investment.

The views expressed in this publication reflect the personal views of the Ameriprise Financial Services analyst authoring the publication. The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.

Past performance is no guarantee of future performance. Asset allocation and diversification do not assure a profit or protect against loss.

In general, equity securities tend to have greater price volatility than debt securities. The market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole.

Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, and historical sector performance relationships as they relate to the business and economic cycle.

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