Late British Prime Minister Harold Macmillan, when once asked what he was most worried about, reportedly said, “Events, my dear boy, events.”
Investors certainly contended with their share of events in the first half of 2019. Between reports of slowing global growth, abrupt shifts in central bank policy, U.S.-China trade tensions and lingering Brexit uncertainty in Europe, investor sentiment has seesawed from confidence to anxiety and back again.
Despite the daily noise, markets have been remarkably resilient. Through to 30 June 2019, the Standard & Poor’s 500 Composite Index has gained 18.54% this year1, while the MSCI All Country World Index ex USA rose 13.60%2.
What should investors expect in the second half of the year? Time will tell how the trade dispute will evolve, or when the U.K. might leave the European Union. The next six months are sure to have their share of market-moving events and investment opportunities. Here are four investment themes to help navigate the landscape as events unfold.
1. Stocks have room to run, but prepare for rougher seas ahead.
Recession you say? Not long ago the “r” word was top of mind for many investors. Then in January the Federal Reserve made a dramatic about-face in monetary policy by suspending interest rate hikes. Major central banks around the world took similar actions, ensuring that monetary conditions remain supportive of growth.
This policy pivot, along with lower for longer rates, is extending the life of the now decade-old expansion. The U.S. economy grew at a solid 3.1% annual rate in the first quarter. Equity markets have responded positively, notching strong gains in the first half of the year. “With the Fed contemplating a proactive rate reduction, I would expect growth to be sustained or even accelerate,” says Capital Group portfolio manager Hilda Applbaum. “This should bode well for markets, at least in the near term.”
Stock markets have room to run, but make no mistake: Late-cycle conditions are mounting. Lower unemployment and rising wages — while tailwinds for consumer spending — will ultimately pressure corporate profits.