We believe 2019 will be a year of transitions. Slower global growth and the fading of financial liquidity will require a more balanced and diversified approach to investing as we enter the next phase of this long expansion.
Unlike the start of 2018, when economies around the globe were delivering synchronized growth, we expect the long global expansion to endure but transition to a slower pace.
The relative deceleration in growth is due in part to the fading of U.S. fiscal stimulus and the reduction of financial liquidity as other central banks join the Fed in tightening monetary policy. But with inflation expected to remain contained and our projection of interest rates moving only modestly higher, solid earnings growth should support equity markets.
We forecast real global gross domestic product (GDP) to slow from 3.7% in 2018 to 3.5% in 2019. In the U.S., growth will likely moderate, from the projected real GDP growth of 3.0% in 2018, to trend growth of near 2.0%. While the global expansion is set to slow and risks are emerging, we do not expect these headwinds to threaten the broader expansionary theme in 2019.
The sustainability of the long expansion will undoubtedly depend on the actions of central banks. While other central banks are likely to gradually withdraw easy monetary policy, the Fed’s recent shift in rate projections aligns with our expectations of a pause in 2019 with only two, or possibly fewer, rate hikes.
We expect 2019 to be similar to 2018: a flattening of the yield curve with the long end of the curve moving up less than the short end. We also expect a modest widening of credit spreads as growth slows.
Corporate earnings growth for 2019 is expected to slow globally as tax benefits fade and companies manage higher input cost and wage pressures. While not as robust as 2018, we still expect S&P 500 companies to deliver a year-over-year earnings growth rate of 5-10%, which should translate into an operating earnings range of between $165 and $175. Earnings, rather than multiples, should support equities markets.
The market volatility that appeared this year should continue, as uncertainty around monetary policy, trade, and potentially disruptive geopolitical events persists.
Overall, we are generally optimistic about the macroeconomic backdrop of slower growth, contained inflation and modestly higher interest rates, and see little sign of recession over the next 12-18 months. However, this mid-to-late cycle stage now calls for a more balanced approach to portfolio positioning that allows for flexibility given the increased risks.
Our slight overweight to diversifiers (investments that don't move in the same general direction as stocks or bonds) has provided a buffer to market volatility without the interest rate sensitivity of fixed income and should continue to play a role in portfolio diversification. Customized hedging solutions may also provide a complement to a well-diversified portfolio for investors who desire more downside protection.
While the later stage of market cycles require a more balanced and diversified approach to investing, they can still be modestly rewarding for investors willing to withstand the higher volatility that often accompanies them. Investors should ensure that their long-term investment plan aligns with their risk profile and goals.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities. The services and products it provides are available only to “professional investors” as defined in the Securities and Futures ordinance of Hong Kong.The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE.The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10007, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5LA. The London Branch is registered in England and Wales with FC No. 005522 and BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E1C 5LA, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and New Foundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2018 The Bank of New York Mellon Corporation. All rights reserved.
Executive Vice President and Chief Investment Officer, BNY Mellon Wealth Management
Leo P. Grohowski is chief investment officer of BNY Mellon Wealth Management. He leads all investment strategy and investment management functions for the wealth management organization, and is chairman of the Investment Policy Committee. Leo is also a member of BNY Mellon's Operating Committee, Benefits Investment Committee, and the Investment Ethics Council.View Profile