August 1918
1996
2.9
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the relationship:
%
1998
Trough
What supports our expectations for continued economic growth in 2019?
AAM's Top Themes for 2019
due to increased financial tensions, which prematurely advances the liquidity strains that occur during the end of every cycle.
$40,000 bln
beyond past historic stress levels may cause increased defaults and delinquencies.
Source: Bloomberg
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.
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.
Expansion
U.S. to Continue Late-Stage Expansion into 2019
Labor Market Strength
2004
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.
october 1945
watch video
2014
7
2016
Labor Market Strength
1990
Deregulation
2016
November 1927
$10,500 bln
State
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.
Important Disclosures
see all 9 of AAm's themes for 2019
2010
2000
10
Deregulation
Net Worth Outstanding right axis, $100,768 bln
1.9
14
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.
$6,500 bln
2002
force the Federal Reserve to be hawkish beyond current market expectations in normalizing monetary policy.
Profit Margin
%
within the European Union move beyond a controlled evolution and fracture several EU economies
july 1921
63
93
the hazards:
1990-1994
Periods Post-
Great Depression
Previous trough
to this Peak
See More
0.00
1992
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.
Current
Avg Expansion : 65 Months
Historical
Average
Peak from
Previous Peak
Source: Bloomberg, S&P
History as a Guide
9.86%
Now
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$80,000 bln
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Source: National Bureau Economic Research. Past performance does not guarantee future results.
2006
Source: National Bureau Economic Research. Past performance does not guarantee future results
duration in months
Annual GDP Growth
13.36%
1994
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Emphasis On
Commodity Sector
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.
Source: Fed Flow of Funds
4.00
Name
2008
36
40
%
As a whole, 2018 made up for 2017’s lack of volatility.
spiral to an actual trade war where global growth
decelerates and internal price pressures advance.
History as a Guide
Labor Market Strength
2012
80
2010-2014
may 1923
13
27
12.00
8.00
may 1937
51
67
january 1920
2001
2011
28
17
Corporate Earnings Growth
Cash Deposits; $11,657 bln
Potential Risks to Our 2019 Outlook
2.0
Corporate Earnings Growth
13
$12,500 bln
S&P 500 Profit and Operating Margin
Peak to Trough
%
22
Increased inflationary and wage pressures
February 1945
1995-1999
Avg Expansion : 25 Months
Trough from
Previous Trough
18
Ratcheted tensions between the U.S. and China
$8,500 bln
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.
2003
Accelerating consumer debt obligation ratios
2.5
Corporate Earnings Growth
$20,000 bln
Strong U.S. Consumers and Businesses
the forecast:
the fundamentals:
You and Your Advisor
Periods Pre-
Great Depression
Shifting political and economic policies
$60,000 bln
contraction
1999
1997
march 1919
2018 Estimated
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2017
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Gross Domestic Product (GDP) Improvement
Business cycle reference dates
8
2015
44
2017
Gross Domestic Product (GDP) Improvement
2005-2009
Deregulation
History as a Guide
cycle
AAM's Take:
2005
Expect Pressure on the U.S. Dollar
with the Chinese Yuan as the Wild Card
october 1926
2009
2015
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.
Expect Healthy Rebound in Emerging Markets
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We’re bullish on late-stage cycle investments with an emphasis on Financials, Energy, Basic Materials, Consumer Discretionary and Industrials.
Strong U.S. Consumers and Businesses
6.00
Earlier-than-expected downgrading of corporate investments
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10.00
Federal Funds Target Rates
june 1938
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.
Favor Late-stage
Investments
40
41
50
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Strong U.S. Consumers and Businesses
2013
88
93
july 1924
2015-2018
1991
Historical
Average
Gross Domestic Product (GDP) Improvement
11.64%
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.
Now
2.00
1993
Household Net Worth and Cash Deposits
Operating Margin
$4,500 bln
6.70%
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1995
1985-1989
Historical Average: 1990-2018
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$100,000 bln
Source: National Bureau Economic Research. Past performance does not guarantee future results.
2007
peak