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.