6-Month Outlook From Manning & Napier

We thought we would forward a market 6-month outlook from a mutual fund provider we use from time to time, Manning and Napier.  We see some big institutions focused on average prices and market fundamentals projecting amazing growth for 2019 and others looking at the technical (charts) forecasting much lower prices.  We think this Manning and Napier outlook takes a balanced approach.

The breakdown of market momentum in December was quite interesting, because it pushed the S&P 500 more than 10% below its 200-day moving average, which has only happened ten times since the late 1960s. In the previous instances, the average decline was an additional 16.6. However, in ½ of the cases, the decline came early on in a larger bear market, and in those cases, the additional downside resulted in -31.58%. In the other cases, the 10% decline below the 200-day moving average occurred within a significant correction that did not turn into a bear market. In these cases, the additional downside only averaged an additional -1.6%.

Given the high valuation levels of stocks, rising interest rate environment, and slowing global economic growth, the initial indications are that the market is more likely to follow the path of a larger decline.  We believe in staying nimble and being responsive to changes as they occur.



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Key Points

  • We believe we are entering a higher-risk period for stocks and bonds
  • The US is showing signs of peak growth and is late in the economic cycle
  • As growth slows, market volatility may rise, and lower future returns should be expected

It was a volatile way to end the year. US equities sharply rose and fell all throughout the holiday season, leaving many investors wondering why we’re going through this risky stretch.

Volatility has increased because the US is in the later stages of the economic cycle. Economic growth has likely peaked, and slower rates of growth should be expected in the quarters ahead. As growth slows, market volatility will likely remain.

Our increased concern for US growth comes at a time when key global risks have escalated, including trade tensions, slowing Chinese growth, and geopolitical uncertainty. We dive deeper into these risks in the subsequent sections.

Among those risks, excessive US corporate debt is a key concern. Taking advantage of ultra-low interest rates, businesses spent years loading up on cheap debt. Should rates move higher, fears over debt sustainability could trigger a recession.

While we see several key risks emerging in the market, classic end-of-cycle indicators are not yet flashing warning signs. At this time, the US business cycle’s drivers are still well-supported.

With rising risks all over, lower future returns should be expected.

Looking Ahead

As the US economy enters late cycle territory, we are reviewing current and prospective investments for end-of-cycle risks, such as companies with too much debt. We favor higher-quality businesses and reasonably-priced growth companies that tend to provide downside protection in riskier market environments. We are lowering exposure to many economically-sensitive names and tech stocks.

US Corporate Debt as a Percent of Revenue


Business Debt is Back to Its Crisis-Era High

Capitalizing on ultra-low interest rates, corporations took on vast quantities of debt during the last several years of the recovery.


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