Around this time a year ago, Seema Shah, chief strategist at Principal Global Investors, warned that stocks were facing an imminent selloff.
Her call proved spot on as 2018 closed with the worst December Dow
and S&P 500
performances since 1931. Fast forward and the S&P is set for its best annual return since 2013, provided next month isn’t a disaster.
Shah provides our call of the day, as she cautions that equities are at risk of another selloff if a partial trade deal can’t be reached before the next China tariff deadline on December 15.
“If that trade deal doesn’t happen and if everything falls apart and it feels like tensions are getting worse, then I think we are facing a potential repeat of last year, and it will be worse,” Shah told MarketWatch. She explains a “bigger shock move” would be probable because liquidity falls so much in December. (Read more about why another December meltdown is easily repeatable.)
But Shah thinks markets will get that trade deal because President Donald Trump is facing an election year and China can’t afford more economic pressure. Further support for stocks will come from a stabilizing global economy in 2020 and continued low-interest rate central bank policies. But she’s keeping her S&P 500 outlook for next year moderate—3000 to 3250.
Shah suggests a barbell-type equity strategy that balances risk/reward for investors. This means that on one end are defensive stocks—she likes higher-quality stocks, such as megacaps, which tend to be more insulated from geopolitical tensions, and real-estate investment trusts that perform well in a low-growth, low inflation climate.
And in a nod to a calmer economic front, on the other end are cyclical stocks, which are tightly correlated to economic activity. “The two sectors that we like are financials and technology…with any kind of upturn we should see a steepening yield curve, which bodes well for financials and any time that there is a boost in market sentiment you’ll always see a rush into technology,” she says.
Shah likes technology security companies in particular, as they seem to ride out lots of economic scenarios. One last tip? Pick up some emerging markets where valuations are looking decent and a stabilizing economy in China could boost other parts of Asia.
If a phase one trade deal is so close, why are soybean prices falling? Andreas Steno Larsen, senior global market strategist at Nordea Markets, tweeted that question and today’s chart. Soybeans are a big U.S. export to China, but tariffs on both sides have weighed on prices over the last couple of years.
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