Our sense is that the two most important catalysts in 2019 will be whether or not (1) the U.S. and China reach a trade agreement; and (2) interest rates rise at a faster pace than is warranted by the global growth outlook. In our view, this leads to very bifurcated potential outcomes. Our base case is that a trade agreement is reached, global central bankers don’t run ahead of the economic outlook, fear subsides, and U.S. equity markets snap back, before rising in-line with earnings growth expectations. However, if we’re wrong and the global growth outlook deteriorates further, there’s probably much more downside ahead.
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U.S. equity markets continue to sell-off as investors weigh concerns surrounding slowing global growth, trade uncertainty, political uncertainty, and portions of the US treasury yield curve becoming inverted.
Key to our overall positive market outlook has been that fiscal stimulus (mostly tax) in 2018 and 2019 will continue to be supportive of U.S. consumer spending. Recently, there’s been considerable confusion and debate over the impact of the Tax Cuts and Jobs Act (TCJA) on tax refunds given significant changes in the tax code, including limitations for state and local tax deductions (SALT). Inside, we summarize our detailed work on the tax refund cycle, the expected impact on the consumer, and our take on the impact of tax under/over withholdings. We also have a Tax Refund Sensitivity Model available for download
Last week, the SPX closed up 4.9% into more dovish comments from Chairman Powell and anticipation of positive news flow from the G20 meeting. Over the weekend, the U.S. and China agreed to a three-month truce on new tariffs. The combination of the Fed's more dovish tone and perceived progress on trade should be a near-term tailwind as investor attention shifts to performance chasing. As such, we expect the market to trade up an additional 3- 5% into year- end lead by growth/momentum names. Looking out over the intermediate term, with the Fed becoming more data dependent, and with trade issues still unresolved, we expect additional bouts of volatility. As such, we expect investment themes centered around cash deployment to outperform the market in the months ahead.
We’ve found investor sentiment readings tend to be solid contra-indicators of shorter-term equity market performance. State Street recently released its investor confidence index for November, which showed institutional investor sentiment is close to the very bottom of the historical range. According to the American Association of Individual Investors, retail investor sentiment has rebounded some, but it also remains decidedly negative.
United Technologies (UTX) announced it will separate into three independent companies: United Technologies, Otis Elevator Company and Carrier. The spin-offs of Otis and Carrier are expected to be completed in 2020.
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