7 trends for investors in the second half of 2019

What to expect this summer and fall.

The first half of 2019 was a wild one for investors, with the S&P 500 gaining an impressive 17%. The ride wasn’t always a smooth one, with concerns over slowing economic growth and an ongoing trade war between the U.S. and China creating volatility in the market. So far, fears over a U.S. recession in 2019 have proven unwarranted, but investors are understandably concerned about what’s coming in the second half of the year. Here are seven predictions about what investors can expect from the LPL Research team.

Fed policy will be dovish.

The U.S. Federal Reserve raised interest rates four times in 2018, but it has put those rate hikes on hold so far in 2019. Fed Chair Jerome Powell said this month that trade tensions and global economic weakness “continue to weigh on the U.S. economic outlook.” The bond market is currently pricing in a 100% chance of a Fed rate cut in July, according to the CME Group FedWatch tool.

GDP growth is slowing.

U.S. GDP grew at a relatively strong 3.1% rate in the first quarter of 2019 after gaining 2.9% in 2018. While the labor market remains strong, consumer sentiment is elevated and spending levels are healthy, U.S. manufacturing has taken a hit from the trade war. LPL says the U.S. economy is positioned for expansion throughout the rest of the year, but growth rates will likely slow significantly. Even after the impressive first quarter, LPL is projecting between 2.25% and 2.5% full-year U.S. GDP growth in 2019.

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The S&P 500 is hitting all-time highs.

Investors may be leery of stocks after the big year-to-date gains so far in 2019, but history suggests years with big first-half gains also tend to have strong second halves as well. The S&P gained 13% in the first quarter of 2019. Throughout history, a first-quarter S&P 500 gain of at least 10% has resulted in an average gain of 6% throughout the rest of the year. LPL says the S&P’s current forward earnings multiple of 17.5 is reasonable, and the firm has a year-end S&P 500price target of 3,000.

Value stocks may outperform.

Throughout this entire decade-long bull market, growth stocks have led the charge while value stocks have lagged significantly. LPL says that dynamic may finally start to shift in the second half of 2019. LPL is relatively overweight large-cap value stocks based on the potential for an improving global trade environment in an aging business cycle. LPL says there is plenty of value in industrials, financials and technology stocks. At the same time, defensive sectors such as utilities and consumer staples appear overvalued given their poor growth outlooks. The firm is “market weight” on the health care and real estate sectors.

Emerging markets will make a comeback.

The trade war has hit Chinese equities hard and the iShares MSCI Emerging Markets Index (ticker: EEM) is down 2.7% in the past year. However, LPL says investors can expect a rebound in emerging market stocks in the second half of 2019. With global economic growth slowing, particularly in Europe, LPL says emerging markets will offer investors a rare source of growth. China appears to have stabilized even without a trade deal and LPL expects India to lead the emerging market group in gross domestic product growth. In the Latin America space, LPL says Mexico will outperform.

The deficit will rise.

While most investors are focusing on the trade deficit, LPL is also concerned about the under-the-radar rise in U.S. deficit spending. LPL says the U.S. has been auctioning off a “glut” of Treasury bonds in the past year to raise money for deficit spending and is operating under the assumption that there is an unlimited demand for U.S. debt. However, as inflation picks up, global demand for U.S. Treasurys may ease, causing interest rates on Treasury bonds to spike. LPL says neither investors nor politicians seem to appreciate the long-term risks that deficit spending create.

U.S. Treasurys will lag.

Bond prices have surged in 2019 and yields have fallen due to several key economic factors. U.S. inflation has remained below 2%, global economic concerns have created increasing demand for “safe haven” assets and ultra-low yields around the world have forced investors to seek returns anywhere they can find them. As a result, LPL is recommending investment-grade corporate bonds and mortgage-backed securities over U.S. Treasurys in the second half of the year. Still, LPL says Treasurys can provide a diversified portfolio with much-needed income, liquidity and stability during periods of equity market volatility.

Trends for investors in the second half of the year:

  • Fed policy will be dovish.

  • GDP growth is slowing.

  • The S&P 500 is hitting all-time highs.

  • Value stocks may outperform.

  • Emerging markets will make a comeback.

  • The deficit will rise.

  • U.S. Treasurys will lag.