Best Ideas

march 1919

1991

Strong U.S. Consumers and Businesses

Ratcheted tensions between the U.S. and China

1997

june 1938

1999

2.0

october 1926

Corporate Earnings Growth

U.S. to Continue Late-Stage Expansion into 2019

1995

February 1945

2003

cycle

Expect Pressure on the U.S. Dollar with the Chinese Yuan as the Wild Card

Expect Healthy Rebound in Emerging Markets

Trough from Previous Trough

Peak to Trough

2017

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january 1920

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We continue to gravitate toward the commodity sector, specifically Energy and Industrial Metals, as these areas tend to perform well during periods of inflation. The pressure that has pushed agricultural commodities lower may have some strong relative outperformance at points in 2019.

contraction

2009

Potential Risks to Our 2019 Outlook

We’re bullish on late-stage cycle investments with an emphasis on Financials, Energy, Basic Materials, Consumer Discretionary and Industrials.

Household Net Worth and Cash Deposits

$20,000 bln

the forecast:

History as a Guide

28 17

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2015

Historical Average

2007

1985-1989

2013

Strong U.S. Consumers and Businesses

$4,500 bln

Increased inflationary and wage pressures

You and Your Advisor

1993

2018 Estimated

$8,500 bln

Strong U.S. Consumers and Businesses

Deregulation

2.00

Earlier-than-expected downgrading of corporate investments

11.64%

Operating Margin

2015

1995-1999

40 41

6.70%

Now

july 1924

Shifting political and economic policies

Corporate Earnings Growth

Periods Pre- Great Depression

This commentary is provided for informational purposes only. The indexes referenced in this publication are not available for direct investment. It is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinions contained in this publication were produced by Advisors Asset Management, Inc. (AAM) and other sources believed by AAM to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supple-mental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are as of December 7, 2018 and are subject to change without notice. All AAM employees, including research associates, receive compensation that is based in part upon the overall performance of the firm. AAM may make a market in or have other financial interests in any given sector or security with which this analysis suggests may be benefited from its conclusions. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Past performance does not guarantee future performance. Chart/Graph Disclosure: The charts/graphs included in this publication do not reflect past or current recommendations made by AAM, “they” should be considered an academic treatment of empirical data and should not be used to predict security prices or market levels. Any suggestion of cause and effect or of the predictability of economic cycles or investment cycles is unintentional. The Best Ideas for 2019 was created using empirical research and analysis by highly experienced market observers and is designed for educational purposes only. This publication should only be considered as a tool in any broker’s, dealer’s or advisor’s investment decision matrix. Investors should consult their financial advisor when applying the assumptions of these charts/graphs.

6.00

$100,000 bln

peak

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88 93

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Historical Average: 1990-2018

Avg Expansion : 25 Months

Source: National Bureau Economic Research. Past performance does not guarantee future results.

2015-2018

2.5

$12,500 bln

2017

Federal Funds Target Rates

2005-2009

Gross Domestic Product (GDP) Improvement

$60,000 bln

2005

Gross Domestic Product (GDP) Improvement

10.00

Corporate Earnings Growth

2011

Accelerating consumer debt obligation ratios

Business cycle reference dates

S&P 500 Profit and Operating Margin

2001

Gross Domestic Product (GDP) Improvement

The U.S. economy has now added jobs for nearly eight straight years. Continuing jobless claims hit a level not seen since 1970 and average hourly earnings rose to levels not seen since 2009. What’s more, the unemployment rate remained at 3.7% percent in November, the lowest in nearly 50 years.

Cash Deposits; $11,657 bln

Favor Late-stage Investments

At AAM, we are committed to helping you succeed. We remain as dedicated today as we were 40 years ago to providing innovative solutions that your advisor and you can leverage to meet your investment needs.

August 1918

Important Disclosures

Consumer and small business owner sentiment numbers remained high, as has the Conference Board Consumer Confidence Index. We expect U.S. consumer spending will continue to be supported by consumers’ strong balance sheets and income statements—net worth and cash deposits are at all-time high levels and the debt-to-assets ratio has declined dramatically since the 2009 peak.

1990

AAM's Top Themes for 2019

For investors who want more than market fundamentals, we can look to history to better understand our current recovery. While recession lengths before and after the Great Depression were similar in length, the expansions were strikingly different: Expansions prior to the Great Depression—the closest comparison to the Great Recession of 2007-09—lasted only 25 months on average, while the two following lasted 65 months on average.

july 1921

2014

Source: Bloomberg, S&P

2006

2012

see all 9 of AAm's themes for 2019

Labor Market Strength

Current

the hazards:

due to increased financial tensions, which prematurely advances the liquidity strains that occur during the end of every cycle.

1992

2.9

$6,500 bln

Source: Fed Flow of Funds

Deregulation holds the potential to extend what has already been an historic expansion. It generally requires several years of continued deregulation to influence business owners to invest in their business versus meeting increased regulatory requirements. In the four-year period following consistent reduction in regulations, GDP increased to 4.3% annually, well-above the average over the last four decades.

0.00

spiral to an actual trade war where global growth decelerates and internal price pressures advance.

Increasing domestic budget deficits and a prolonged global economic recovery will likely pressure the U.S. dollar in the second half of 2019. We see gains in the euro, the pound, and a slight gain in the yen. The wild card is the Chinese yuan, whose direction will likely be determined by how quickly and to what degree trade tensions are resolved.

2008

Emphasis On Commodity Sector

1994

Labor Market Strength

1.9

within the European Union move beyond a controlled evolution and fracture several EU economies

1996

may 1937

1998

2016

36 40

Deregulation

November 1927

As a whole, 2018 made up for 2017’s lack of volatility.

63 93

the fundamentals:

2002

Expansion

Previous trough to this Peak

State

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51 67

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We expect Emerging Markets (EM) to bounce back, particularly Asia, though still favor some broad-based exposure. We generally favor EM equities rather than debt though select debt may generate strong performance.

Trough

9.86%

Avg Expansion : 65 Months

the relationship:

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2016

12.00

2000-2004

Although the Federal Reserve’s attempt to balance raising rates with supporting economic growth will be a challenging task, we expect the U.S. economy should be able to absorb the anemic pace of rate increases (relative to previous cycles). Globally, we also expect to see a rebound in both Europe and Emerging Markets believing the new trade agreements with Mexico and Canada are more indicative of the likely resolution to the current trade skirmishes, particularly with China.

$40,000 bln

2004

Source: Bloomberg

8.00

Deregulation

2010

force the Federal Reserve to be hawkish beyond current market expectations in normalizing monetary policy.

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What supports our expectations for continued economic growth in 2019?

Earnings margins in 2018 have improved, albeit partially due to tax reform and the repatriation of U.S. dollars held abroad, both of which served to increase earnings per share (EPS) from a synthetic level. Expectations are for single-digit earnings growth in 2019 given more difficult year-over-year earnings comparisons, however we still expect it to remain above average.

2000

AAM's Take:

History as a Guide

Net Worth Outstanding right axis, $100,768 bln

Labor Market Strength

$10,500 bln

Investors reacted to tax reform, fiery trade discord, mid-term elections, rising interest rates and multiple natural disasters. Not surprisingly, the U.S. equity markets experienced dramatic swings throughout the year, hitting new highs in January 2018 before giving back more than their year-to-date gains by year-end. Emotions can skew investor sentiment, to the point of overlooking economic fundamentals. Which is why, despite the “noise”, we believe that the U.S. will continue its late-stage expansion into 2019. That said, it’s critical to be vigilant in monitoring changing conditions that could potentially propel a recession.

Peak from Previous Peak

1990-1994

Now

Historical Average

Name

may 1923

beyond past historic stress levels may cause increased defaults and delinquencies.

13.36%

Profit Margin

4.00

october 1945

$80,000 bln

duration in months

History as a Guide

Annual GDP Growth

Periods Post- Great Depression

Source: National Bureau Economic Research. Past performance does not guarantee future results.

2010-2014

Source: National Bureau Economic Research. Past performance does not guarantee future results