If you feel like it’s been a tough year in the market, you’re not alone. In 2018, virtually no asset class has provided safety. At -3%, US equities are down less than many other asset classes. Developed market equities have slumped 16%, similar to emerging markets equities (-17%) and energy (-15%). The Trump Administration strategy of using tariffs to alter terms of trade is blamed for growing concerns over global growth. The U.S. economy’s huge domestic market renders it less affected by trade than most others. Nonetheless, lower global growth is having an impact.

In a startling survey, CNBC found that almost half of U.S. corporate CFOs expect a recession to begin within twelve months. 82% expect a recession within two years. One doesn’t normally consider Federal Reserve members wildly optimistic, but in September they revised their 2019 GDP forecast up modestly (from 2.4% to 2.55%). Although they expect a slowdown by 2020, they’re still forecasting around 2%. The Fed is more bullish than corporations.

Bonds have not provided any protection either this year, with returns of -3%. Unusually, about the only asset class to provide positive returns is cash. The last time this happened was 1969.

The recent sharp drop in stocks has led to fund outflows. Last week’s $39 billion pulled from global equity funds was a record, and it was accompanied by $8 billion in withdrawals from investment grade bonds. Asian stock and bond funds are on track for their first year of net outflows since the 2008 financial crisis.

For a while, rising interest rates were felt to be the biggest threat facing the economy. The Fed is still projecting short term rates of around 3.5% next year, but the recent market turmoil has lowered ten year yields back below 3%. Two year yields of around 2.7% show the market thinks rate hikes next year are unlikely.

The Fed continues to unwind its balance sheet.  Beginning with $10B/month in the fourth quarter of last year they’ve increased the pace to $50B/month as quantitative tightening is now in full swing.

That leaves trade tensions as the meaningful source of investor angst. Given how traders react to Presidential tweets suggesting a resolution, a deal with China could provide quite a boost. Although it’s hard to forecast with any confidence, both sides must recognize that they benefit from reduced trade barriers. Given the decision-making freedom afforded both leaders, a compromise could come at any time and be arrived at quite quickly.

Earlier this year, growth concerns were limited to emerging markets, where tariffs and the strong dollar have greater impact. But the S&P500 has fallen 13% since its September all-time high. Although it’s not yet a bear market (defined as down 20%), emerging markets and oil have both passed that threshold.  Within the S&P, more cyclical sectors including financials, materials and energy have also reached that threshold signaling market concern around a slowing economy while the less economically sensitive utilities sector is near its highs for the year.  Although the steady cash flow businesses of midstream MLPs & energy infrastructure companies more closely resemble utilities they have traded with energy stocks.

2019 S&P earnings are expected to grow by 12% according to Factset. Bond yields below 3% scarcely offer much return, and equities continue to look relatively attractive based on the Equity Risk Premium (see Bonds Still Can’t Compete with Stocks). The bearish outlook of corporate CFOs is troubling, but isn’t yet showing up in, for example, lower capital spending. As long as that remains the case, relative valuation will continue to favor equities.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (USAIETF.com).

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.