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- At TheStreet we're all about stock picking, but investors still have to build a portfolio that makes sense for them. Luckily we have Tony Roth here, CEO of Wilmington Trust to run us through what we can look at in building your portfolio in 2019. So Tony, right now obviously, we look at stocks all the time and in different sectors, but I wanted to step back and take a look at bond markets versus equity markets. Could you kind of run me through what you're looking at in building portfolios for your clients and what might be more attractive this year?

- Yeah absolutely, thanks for having me. So when we look at the equity market, we actually like where the economy is going, and therefore we like where the equity markets going. However, the equity market we have the twin risks of the government shutdown, and the trade situation with China. And so we can't just look at the fundamental outlook at the economic level, we also have to think about these exogenous risks. And so we like equities, we think they'll do probably around 10% this year. If in fact those two risks don't materialize. In other words, the government doesn't stay shut for too long, which I would define probably as more than a couple months or so, and that the trade situation with China doesn't lag on beyond the first half of the year. On the other hand, the bond market has some real risks associated with it. Because when we look at the long bond, which is about 2.7% now in terms of a yield, we think that the long bond is really mis-pricing risk. So the long bond should be higher, because the fed is actually unwinding its balance sheet, and China is selling treasury securities, there should be probably a steeper yield curve than what we have today. So as that starts to occur, that yield curve starts to steepen, that's gonna have a negative impact on bond prices. And then the other risks with bonds, or negative aspect of bonds, is that if we do have, unlike our best case scenario, if we do have one of those two risks actually occur. IE the government just stays shut, or the situation with China worsens and there are more tariffs. That will be a risk off event, and because there's not enough liquidity in the bond market that could cause a real downward spike in bond prices. So we like equities more than we like bonds. Having said all of that, there's one important caveat for our clients who are wealth investors, which is that those comments about the bond market don't apply to the municipal bond market.

- Gotcha.

- So the municipal bond market, where most wealthy clients play, is an area where we're seeing the credit quality of bonds and the balance sheets of municipalities hang in there very very well. So they're in good health, there's relatively limited supply in the municipal bond market, and so for clients that wanna build portfolios with duration of maybe three years or so, in the municipal bond market we feel very good about that as an anchor to wind work in portfolios even if we have a risk off event.

- Interesting, so there's still pockets of opportunity there.

- Yeah, that's right.

- I'm curious about which is more material to your risk scenarios though. The shut down or the China trade risks in the near term?

- That's a great question. So if you had asked me that question a week or two ago I would have certainly said the China situation. However, having said that, now that we're further along into the shutdown, and of course now it's the longest shutdown ever.

- Almost a month now, yeah.

- That's right, and a lot of the media has been very excited to talk about it being the longest ever. The balance of risk has really changed. I think that there's even more pressure on both the administration here in the US, and the Chinese government to find a solution. Doesn't mean it has to be an overwhelmingly substantive solution, but it just needs to be something that allows both sides to say they've reached a deal and to be able to walk away from the tariffs.

- And that would be huge for investor sentiment as well, even if it's not substantive in your view?

- I think that's right, because what the markets care about in the short term is whether or not tariffs are going to torpedo the economies of either country and the global economy in the short term. The more substantive aspects of protecting intellectual property, the terms of trade, et cetera, that'll matter to the US economy, but over decades, and so the markets aren't gonna discount that right now.

- Gotcha, and I wanted to talk about something more timely as well, because one of the bedrocks of the market is of course banks. And it's a big earnings week, and I was hoping for your take on the bank earnings this week, and then also some of the management commentary moving forward from them as well.

- Well it's been an interesting earnings season so far for the banks, it's been a bit mixed. We started off with Citi, they did fairly well, their trading revenue was down of course. Then we had the big miss by JP Morgan, and then more recently both Goldman and Bank of America have performed quite well. I would say the common denominator from the banks, which is probably the most important takeaway in our view is that all the banks, even the ones that missed pretty significantly, have shown that the consumer is in good health. So the deposit and loan activities from all these banks have really reflected a strong consumer, and that's really good for the economy. And it means that if we don't have either of those risks continue, if you will, the trade situation with China, or the government shutdown continue too long, that there's a really nice runway for the banks. Especially if the yield curve steepens as we're expecting it to over the course of the year. Where you really found stress in the banks has been more around the trading and the investment banking areas, clearly if the government stays shut it's gonna really impact the MNA space, IPOs, in fact there are no IPOs because they're not being reviewed right now by the SEC because the SEC is closed. So the government shutdown I think will really negatively impact banks, in particularly the money center banks, if the government doesn't open again.

- Definitely, and that'll huge in the material to Goldman, for example, that was really bolstered by MNA activity as well as financing IPOs and getting behind those as well.

- That's a great point.

- And I wanted to pick you up on the consumer segment though because that applies to numerous sectors, and I'm curious about what you're seeing as a main beneficiary in sector views on the strong consumer heading into 2019.

- Well it's certainly we like the consumer discretionary sector much more than, so we like sort of the cyclicals more than the defensive plays overall, but we're very focused on quality stocks. Momentum stocks have done very well for many years now, and so stocks that have lower volatility of earnings across multiple sectors we think will do well. In terms of consumers, the other thing that I would point to is technology and electronics types of companies. If we do have the situation with China resolved, that is a very identifiable catalyst for the technology segment. And so we expect technologies to really rally if and when the China situation gets resolved. If it doesn't then the risk goes in the other direction of course.

- Well there's certainly a lot of question marks out there but I really appreciate you running me through all this and all of the factors that we'll certainly be watching when they do add periods to those sentences that currently have those question marks. Thank you very much for being here Tony, I appreciate it.

- Yeah, thanks for having me.

If your building a portfolio for 2019, equities are still king.

Tony Roth, CIO of Wilmington Trust, a major investment manager with nearly $100 billion under management and over $150 billion under administration, said that investors shouldn't be any less aggressive in 2019.

"We actually like where the economy is going, and therefore we like where the equity markets going," he said. "We like equities, we think they'll do probably around 10% this year."

He highlighted that risks remain related to the government shutdown and the long-standing Sino-American trade spat, but that the alleviation of these risks, which many feel is probable in 2019, could only serve to build his bullish outlook further.

Roth was more cautious on bonds, however, highlighting the problems associated with a flattening yield curve.

"The bond market has some real risks associated with it," he said. "When we look at the long bond, which is about 2.7% now in terms of a yield, we think that the long bond is really mis-pricing risk. So the long bond should be higher, because the fed is actually unwinding its balance sheet, and China is selling treasury securities, there should be probably a steeper yield curve than what we have today."

He added that the exogenous risks highlighted in the government shutdown and the trade war could be more pronounced in bond markets as well.

"If we do have one of those two risks actually occur, i.e. the government just stays shut, or the situation with China worsens and there are more tariffs, that will be a risk off event," Roth explained. "Because there's not enough liquidity in the bond market, that could cause a real downward spike in bond prices. So we like equities more than we like bonds."

He said that the pockets of opportunity for risk-averse investors is mostly resigned to the municipal bond market.

"The municipal bond market, where most wealthy clients play, is an area where we're seeing the credit quality of bonds and the balance sheets of municipalities hang in there very very well," Roth clarified. "There's relatively limited supply in the municipal bond market, and so for clients that want to build portfolios with duration of maybe three years or so, in the municipal bond market we feel very good about that as an anchor to wind work in portfolios even if we have a risk off event."

As far as sectors to target as the market remains attractive for equity investors, Roth identified consumer discretionary and technology as as key sector picks, but noted not to jump on the momentum bandwagon.

"Momentum stocks have done very well for many years now, and so stocks that have lower volatility of earnings across multiple sectors we think will do well," he said. "In terms of consumers, the other thing that I would point to is technology and electronics types of companies. If we do have the situation with China resolved, that is a very identifiable catalyst for the technology segment, so we expect technologies to really rally if and when the China situation gets resolved."

So, as pockets of opportunity in fixed income remain sparse overall and key catalysts could come to be realized, stocking up on stocks is still a good resolution for 2019.

For more of Tony's take on the market in 2019, a reflection on bank earnings from J.P. Morgan (JPM) Wells Fargo (WFC) , Citi (C) , and Goldman Sachs (GS) , and a forecast on the risks from the government shutdown, check out the full interview above.

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