September 2, 2019 BARRON’S 13
Fivemarketstrategistssizeuptheoutlookforstocks,bonds,andindustry
sectors.Lookformodestgains,atbest. ByNicholasJasinski
TradeWillCallthe
Market’sTuneThisFall
“TWITCHY.” “SKITTISH.” “ANXIOUS.” THOSE ARE THREE
wordsthatsomeofWallStreet’stopstrategistsuse
todescribecurrentmarketsentiment,asinvestors
return from their summer vacations to trade ten-
sions,confusingeconomicdata,anduncertainmone-
tary and fiscal policy plans.
Anyoneofthosefactorscouldpushstocksina
bullish or bearish direction. Small wonder, then,
there’s no consensus among the five investment
strategists Barron’s recentlysurveyedontheout-
look for markets in the months ahead.
The S&P 500 index has risen 16.7% year to
date, closing Friday at 2926.46. Along the way, it
hit a record 3027, before retreating in August on
fearsofaloomingrecession.Thestrategists’aver-
age S&P 500 target for year end is about 2933, a
mere 0.2% above where the benchmark index is
now. But that consensus estimate obscures fore-
castsrangingfrom2700(adropof7.7%)to3100(a
gain of 5.9%).
Similar divergences hold among these strate-
gists regarding the outlook for 10-year Treasury
yields, with year-end predictions as low as 1.25%
and as high as 2.15%.
Tradeisatthecruxofthecurrentuncertainty.
Under one scenario, the U.S. and China could
strike a deal on relatively noncontentious issues,
leaving unanswered questions about intellectual
property and sensitive strategic or military tech-
nologies. Then again, as one strategist says, the
U.S.couldopennewtrade-warfrontsagainstthe
EuropeanUnion,SoutheastAsiannations,orMex-
ico and Canada.
“Thebiggestunknownvariable,byfar,istrade,”
saysDubravkoLakos-Bujas,chiefU.S.equitystrat-
egistatJ.P.Morgan.“Sowhenyoutrytoforecast
thedirectionofthemarket,itbasicallyboilsdown
to your opinion on where trade is going to go.”
The first-order effects of tariffs aren’t large.
America’s annual gross domestic product is $
trillion;U.S.importsfromChinatotaljust$500bil-
lion,whileexportstoChinaaddupto$130billion.
Butthetradeconflict’simpactoncorporatebehav-
iorandinvestorsentimentareofgreaterconcern.
The Federal Reserve and others contend that
companies with supply chains exposed to China
might delay capital spending until there is more
clarity on how the conflict plays out. That could
meanlowerspendingnowandweakerproductivity
later, reducing economic growth.
Thetradequestionalsoaffectscorporateearn-
ings.OurpanelgenerallyseestheS&P500ending
2019atamultipleofaround18timesthisyear’ses-
timatedearnings.Butnoneofthesestrategistssees
S&P earnings rising by more than 4% this year
from2018’s$161ashare,whichatrillion-dollarfed-
eral tax cut helped swell by 22%.
Lakos-Bujas has a year-end target of 3000 for
theS&P.Henotesthatithasbeenrelativelyeasy
to implement tariffs until now because “the U.S.
consumer—the U.S. voter—was relatively insensi-
tive” to the products involved. That won’t be the
case for future rounds.
“What’sremainingnowistheconsumer-sensitive
areas,”hesays.“Thereisn’taveryhighprobability
that,inare-electionyear,PresidentTrumpwillend
upsqueezingthebestthingwehaveinthiscountry
economically,whichisthehealthoftheconsumer.”
The most bearish strategist in our group is
SairaMalik,headofequitiesatNuveen,TIAA’sin-
vestment unit. She expects S&P 500 earnings to
decline by about a percentage point in 2019, and
the index to fall to 2700.
Edward Yardeni, president of Yardeni Re-
search, our top optimist, sees the S&P 500 rising
to3100byyear-end.“Atsomepointinvestorswill
just focus on what the underlying fundamentals
are,”hesays,referringtolowunemployment,high
consumerconfidence,andrisingwages.“Ifwecan
justlookattheeconomyobjectively,theweightof
the evidence should indicate that the economy is
stillgrowingandisn’tindangerofimminentreces-
sion...even with the uncertainty about trade.”
Sharp down days for stocks could persist,
caused by negative trade or economic headlines,
but Yardeni advises treating them as buying op-
portunities.Hecounts65stock-market“panicat-
tacks”overthepastdecade,eachfollowedbyare-
liefrally—themostrecentbeingtheearly-August
sell-off that pushed the S&P down by more than
5% in about a week.
Malik doesn’t see the tariff issue going away.
ShepointstodeterioratingdataonU.S. manufac-
turing, including steadily declining readings that
have pushed the Institute for Supply Manage-
ment’smonthlypurchasingmanagers’indexclose
to economic-contraction territory. Her biggest
worryisthattariffswillcausenervousconsumers
to trim spending—and lead to a recession. “The
mainissueisthatyou’reseeingaslowdownineco-
nomicgrowth,”Maliksays.“Tariffsarejustmak-
ing it worse and may cause you to pull forward
your timing of a bear market and recession.”
The rapid tumble this year in bond yields to-
wardrecordlowswouldseemtoimplyasmuch.A
keyportionoftheTreasuryyieldcurveinvertedin
August,meaningshort-termratesarehigherthan
those on longer-term issues, further stoking con-
cernaboutarecession.Historically,theU.S.econ-
omy has begun to contract about 14 months after
such an inversion.
RichardLacaille,globalchiefinvestmentofficer
“Whenyoutry
toforecast
thedirectionof
themarket,it
basicallyboils
downtoyour
opinionon
wheretrade
isgoingtogo.”
Dubravko
Lakos-Bujas
Magoz