A likely scenario when judging the best ETFs in 2019 will be a tale of two markets, as economic indicators point to eroding conditions as the year progresses.
To reiterate a point made in this column at the beginning of the year, investors can expect a positive carryover of momentum from 2018, to last at least into Q2 and early Q3 2019. But the second half of the year could see significant sector rotation out of risky assets and sectors and into safe havens, such as SPDR Gold Shares (NYSEARCA:GLD), and defensive sectors, such as health, consumer staples and utilities. Bond funds could also see price gains as yields flatten or decline.
Although there is no recession in sight in 2019, investors will soon begin to structure their portfolios for 2020. This is because the stock market is a forward-looking, discounting mechanism, that tends to reflect the collective expectations of investors three to six months in advance.
Should the prospects for economic growth continue to deteriorate, which has already materialized in 2019, there will be increased demand for safe-haven assets and defensive stocks in the second half of 2019.
Why GLD Is Still a Second-Half 2019 Prospect
Many of the same reasons for buying GLD and defensive sectors in 2019 still remain intact and are growing more prominent:
- Tariffs and the U.S. Dollar: The last remaining potential boost for stocks in 2019 is a favorable trade deal between the U.S. and China. However, any significant trade deal will either be a short-term boost for the market or will end up being a “sell the news” event. Either way, a trade agreement would eventually place new downside pressure on the U.S. dollar, making GLD and other precious metals more attractive.
- Interest Rates: At the beginning of 2019, the Federal Reserve was expected to raise rates at least twice during the year. Now the Fed has signaled it will pause its monetary tightening until 2020, as it continues to watch economic conditions. This increases odds for a rate cut and gold prices generally move in the opposite direction of interest rates.
- Yield Curve Inversion: During the first quarter, the three-month Treasury yield surpassed the 10-year Treasury, marking the first yield curve inversion since 2007. This news initially spooked the market and inspired a big selloff in stocks and gains in safe havens like gold but the ominous signal was soon shrugged off, as stocks continued their climb.
In summary, it appears now that the stock market is climbing a wall of worry. While economic conditions could remain moderately healthy in the near term, slower growth and no new monetary or fiscal stimulus in the foreseeable future don’t point to a rosy second half of 2019. In addition to the Fed dovish turn on its rate policy and the recent yield curve inversion, a new downward revision on Q4 2018 GDP was released as this story was being written.
While a large position in GLD is never prudent in portfolio construction, an allocation of 5%-10% now, in addition to increased exposure to bond funds and defensive sectors, can be a wise choice as 2019 progresses.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds GLD in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.
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