The markets are giving off mixed signals. There’s a strong case for stocks. The S&P 500, NASDAQ and the Dow Jones Industrial Indexes all closed at record highs on July 12. This case is supported in recent statements by the Federal Reserve Chairman that seem to all but guarantee a rate cut at the Fed’s July meeting. An accommodative monetary policy for the Fed would seem to be just what the doctor ordered to give the economy a jolt of stimulus particularly with uncertainty about China.
On the other hand, bond markets are showing strength which is causing yields on long-term debt to drop. This means the yield curve is flattening. And if the Federal Reserve lowers interest rates as expected, investors may be looking at an inverted yield curve. When the yield curve inverts, it is usually a harbinger of a recession within 12 to 18 months.
Uncertainty increases the risk premium for stocks
All of this uncertainty ensures that the market will be volatile for the remainder of 2019. So where should investors look to invest for the rest of the year? Volatility adds risk, but the risk is a variable that investors can manage. Here are three suggestions for how to invest $20K for the rest of 2019.
Index fund investors may want to get active
Actively managed funds have fallen out of favor over the last few years. Passively managed index funds have been shown to deliver comparable, if not better, returns than actively managed funds. However, in volatile times, investors who have a larger appetite for risk may find an actively managed fund to be an appropriate hedge, particularly if investors are looking at small- or mid-cap funds that hold U.S. stocks which are expected to deliver subdued returns even with the stimulus that comes from a rate cut. A recent Morningstar report bears this out citing that nine of the top 10 performing funds through June 30, 2019, were actively managed. The same study showed that 49% of large-cap active managers outperformed the S&P 500 in the same time period.
Foreign stocks are providing strong value
U.S. stocks have been on a tear, but diversification is always a good idea and foreign stocks are showing a lot of strength. China, despite reporting their slowest quarterly growth in nearly 30 years is still up nearly 30% for the year. And at 15% growth for 2019, European equities are showing that they are worth a closer look. One of the reasons for this is better valuations. Many European stocks are trading at 13 to 14 times next year’s earnings which is significantly lower than the 18 times next year’s earnings for the S&P 500. Dividend investors can also enjoy an average yield of 4% between the continent and the U.K. as opposed to a 1.8% dividend yield for the S&P 500. And with the European Central Bank showing no signs of ending its stimulus program (and, in fact, rumors persist that they may begin to purchase equities like the Bank of Japan) the European equity markets should continue to have some support to help offset its challenges.
The best offense may be a good defense
For investors who are looking to stay closer to home, defensive stocks are a tried and true strategy to combat volatility. Defensive stocks are less vulnerable to economic downturns because consumers will need – or prioritize – these products. Recently, defensive sectors such as health care and apartment REITs are showing strength. But you can also invest in blue-chip companies like Hershey (HSY), Coca-Cola (KO), and Kraft Heinz (KHC). In addition to providing stable capital growth, defensive stocks typically pay dividends with many companies being dividend kings or dividend aristocrats meaning they have a proven record of increasing their dividend for a period of 10 to 25 years.
Investing is about making money in any market
One of the challenges of investing is that the factors that may influence the market next year are not necessarily even on the radar right now. However, based on what we know right now, as 2019 moves into its final months, the same reasons to be optimistic about the market are also reasons for concern.
- If the U.S. reaches a trade agreement with China, markets will respond positively. At this point, if the two companies keep the lines of communication open that would be seen as a victory. However, if the trade war drags on the effects would start to be seen in U.S. companies many of whom already are reporting supply chain challenges.
- If the Fed lowers interest rates, the market will undoubtedly get a short-term boost. But like any form of stimulus, the effect is temporary. If the U.S. economy continues to weaken, the Fed may have no choice but to continue lowering rates to keep the economy out of recession.
Overall there are many reasons to be optimistic about the markets for the rest of 2019. And with a Presidential election in 2020, the current administration will be doing whatever they can to keep the economy strong. Taking prudent steps to maintain a diversified portfolio is the surest way to manage risk in your portfolio.