Investors will not know the country is facing a market downturn until it is already here, said Omar Aguilar, chief investment officer of equities at Charles Schwab Investment Management.
No one knows when the bullish economic cycle will end, but it is already unwinding, Aguilar added during a Thursday webinar on Schwab’s 2019 outlook. “We are going to go into a deceleration phase in 2019. The increase in interest rates by the Federal Reserve Board and higher inflation will put the brakes on growth.”
But Brett Wander, chief investment officer of fixed income at Charles Schwab Investment Management, said the Fed may not keep up its quarterly increases in interest rates.
“They could raise the rates again in the meeting next week but it is not a done deal,” Wander said. “After that, rates might only be raised once during 2019. By the end of the next year, the Fed may actually be talking about lowering rates again.”
The volatility the market has been experiencing in the last few months will continue through 2019, particularly as the global economy also begins to decelerate, Aguilar said. In this environment, health care, consumer products, banks and REITs should do well. Avoid sectors such as energy, materials and multinational companies, he added.
“The first half of 2019 will remain uncertain politically because of the continuing Brexit debates, the Italian political scene, uncertainty at the European Central Bank, trade wars and tariffs." Aguilar said he feels the dollar will not be as strong next year and therefore emerging markets will be attractive.
“Even if the economy slows, it will still be strong, but the attitude of investors has changed from outright confidence to an aversion to risk," said Aguilar.
“People are concerned about what could go wrong. In the past, President Trump’s tweets have not had much impact on the market, but now they are triggering more volatility. In the face of changing market sentiment, investors should reassess their risk tolerance and avoid overreacting to the daily news,” Aguilar added.
In contrast to equities, the fixed-income space will not see an inordinate amount of change, Wander said. “Traditional thinking says a flattening yield curve [which we have] is a precursor to a recession, but I think it is more nuanced than that. The top line advice for investors is do not overreact and keep in mind what the fixed-income part of your portfolio is for: to provide stability. In times of stress, investors often are too aggressive in pursuit of yield.”