Near-Term Pessimism Driving Markets, But Many Ingredients For A Rally Still Present

BNY Mellon’s Lockwood issues Investment Insights for the first quarter, expects slowing, but steady economic growth

King of Prussia, Pa. — Markets have discounted a great deal of future slowdown driven by the many political and economic factors weighing on stocks over the past month, according to the Investment Insights issued today by BNY Mellon’s Lockwood Advisors, Inc. (Lockwood).

Since the fourth quarter, investors have not put much stock in economic forecasts, fundamentals and valuations, according to the report. Instead, they have largely been preoccupied with future developments, as technical and pessimistic sentiment has driven markets.

“Markets were rattled by politics in the fourth quarter, with concerns over global growth, central bank tightening, trade disputes, uncertainty around Brexit, and plummeting oil prices among the factors that weighed on investor sentiment,” said Matthew Forester, chief investment officer at BNY Mellon’s Lockwood Advisors and the author of the report.

“But the U.S. economy’s changing trajectory is not that different than that of turning a battleship. The economy may be decelerating a bit, but it’s still progressing at a solid clip and is generating positive momentum early in 2019. If markets can limit the damage to near-current levels, they could potentially surf the wave of worry higher this year.”

Highlights from the report include:

• Markets will obsess over Fed policy for the next few quarters
  Recent stock market turmoil may not be enough to force the Fed to move at a slower pace in 2019, but the U.S. central bank, as evidenced by Chairman Jerome Powell’s recent remarks, will at least communicate that it shares market concerns. The Fed has always been data dependent and will likely be very sensitive to new hard data on the direction of the economy.
• Recent economic data shows recession risks are emerging
  The global economy has moved from a synchronized recovery to a global synchronized slowdown. Only 8% of global economies are now growing above recent averages, with the U.S. leading the pack and emerging markets in the middle of the list.
• Trade negotiations will remain a driving force for markets
  While there was hope that the G20 Summit meetings would launch serious negotiations between the U.S. and China, Lockwood believes that it’s unrealistic for markets to expect the resolution of large, complex trade disputes within a short time frame. According to the report, the mutual benefits of reaching an agreement outweighs any political gains to be made through the escalation of the trade war and any substantive moves towards a resolution of this trade dispute could help to calm market sentiment.
• Changing demographics can impact economic perceptions
  The Administration on Aging estimates that the fraction of the U.S. population aged 60 or older will increase by 21% between 2010 and 2020 and by 39% between 2010 and 2050. Many investors’ frame of reference for market returns are based in the past, perhaps well in the past, when basic macroeconomic factors looked more sanguine.
• Volatility is here to stay. Advisors should plan accordingly
  The number of factors likely to trigger chaotic trading and continued volatility are on the rise. As such, financial advisors may want to consider increasing allocations to more defensive sectors, higher-quality fixed income and overall defensive portfolio selections. Risk management was the key feature in successfully navigating 2018 and will likely be just as important in 2019.

For more information on these trends, please visit www.lockwoodadvisors.com to view the full report and relevant disclosures.

This material is intended for informational purposes only and does not constitute investment advice or an offer or solicitation to purchase, hold or sell any securities. The opinions expressed by Lockwood are as of January 2019, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Lockwood to be reliable, but are not necessarily all inclusive. This material may contain forward-looking information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

About BNY Mellon’s Lockwood Advisors, Inc.

Lockwood Advisors, Inc. is a leading provider of managed account solutions. As a program sponsor, Lockwood offers access to some of the industry’s leading investment managers, provides independent research on separate account managers, and develops advisory solutions to help investment professionals meet the diverse needs of their clients.

Lockwood also offers discretionary portfolio management solutions through financial institutions and independent registered investment advisers. Lockwood Advisors, Inc. is an investment adviser registered in the United States under the Investment Advisers Act of 1940, an affiliate of Pershing LLC and a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon).