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By Mike Liss, CFA, CPA - May 7, 2019
When the markets struggled during fourth quarter, value investing was the darling—outperforming growth for the first time in a long time. Then growth and value swapped places in the first quarter of this year, creating a pretty tough slog for value investors.
The market environment may be tough, but I’m still optimistic. We’re seeing opportunities in undervalued sectors, especially as global geopolitical and economic dramas play out. Watch the video below to get my full outlook and where I see good risk/rewards for our clients.
We think that the market is roughly around fair value. But that corporate earnings are going to grow slowly in 2019. And so, we think that the market backdrop is okay. But we see some really good risk/rewards and some undervalued areas within energy, healthcare and financials.
In terms of growth versus value, it's still a pretty tough slog out there. In the first quarter, growth really beat value by a material amount—by about 500 basis points if you're talking in terms of the Russell 1000 Index. So, it's still kind of tough. But that just means there's better opportunities out there for our clients.
There's been several themes that have affected the market in the first quarter. First are the trade talks with China. We've got a slowdown in the growth rate of global GDP (gross domestic product). The Federal Reserve (Fed) changed their interest rate policy. And then we had the subsequent reduction in rates as a result of the Fed’s change in interest rate policy.
I'm not an economist, but it certainly seems like the right thing to do. So, we have felt that the Fed kept rates too low for too long. And then they finally started raising them. And they've raised them enough where it's really, it hasn't choked off economic activity. But it's made it go a little bit slower. Inflation isn't picking up. It's staying steady below 2%. So, they have room to operate there. But you saw a slowdown in autos. And you saw a slowdown in housing because interest rates had backed up. And so, the Fed had to recognize that.
So, in the first half of the year we had winds of foreign exchange and China. In the first half of 2018, foreign exchange—the U.S. dollar really strengthened, and so foreign currencies really weakened. It's going to take us to get to the back half of the year to get that. And once we get there, it's going to help corporate earnings that are based internationally outside the US. So that's a concern. But I think that can get better in the second half of the year.
If China's economy starts to at least stabilize where it is, and they're able to send a little bit more to Europe, and if Europe is able to start to send some more goods over to China because there's a little bit of an increase in demand, I think that's going to help both economies. And I think that's going to come back here as well. You have to remember that corporate America gets roughly 30% of its revenues from overseas. And if Europe does a little bit better and China does a little bit better, that's going to help U.S. corporations as well.
Despite the fact that global GDP has definitely slowed down, we don't think that we're headed for a recession. And with the market trading around fair value, we think that there are some good risk/rewards in certain sectors that should lead the market as the year goes along.
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What will 2019 look like? This quarter, Portfolio Manager Mike Liss considers the cumulative effect of crosswinds such as trade tensions and tax cuts.
November 30, 2018
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