14 BARRON’S September 2, 2019
of State Street Global Advisors, sees long-term
yields continuing to slide, with the 10-year Trea-
sury note yielding 1.25% by Dec. 31, versus Fri-
day’s 1.51%. And that’s down from 2.86% a year
ago. The RBC Capital Markets and J.P. Morgan
houseviewscallforareboundinthe10-yearyield
to 2.15% and 1.95%, respectively.
TheFederalReservemighthavesomethingto
sayaboutyieldsandapossiblerecession.Although
mostcurrenteconomicindicatorsremainsolidlyin
expansionterritory,theU.S.centralbanklowered
itsbenchmarkinterestratebyaquarterofaper-
centage point in late July. That was the first cut
since the financial crisis. In explaining the move,
Fed Chairman Jerome Powell cited uncertainty
causedbytradeconflicts,persistentlylowinflation,
and economic weakness abroad. Other central
banks also have eased monetary policy.
“Theverysharpturnaboutincentralbankpol-
icy expectations [this year] was brought about
more by fears about the future, rather than hard
data,”saysLacaille.“It’shardtoseethatinterest
rates were crushing either consumers or busi-
nesses.”
Our panel predicts at least one more quarter-
pointcutinthefederalfundstargetratethisyear,
from the current 2%-2.25%, a view reinforced by
thefuturesmarkets.“TheFedisineasingmode,”
with lower rates helping to tamp anxieties about
the trade war, says Lori Calvasina, RBC Capital
Markets’ head of U.S. equity strategy.
CalvasinaseestheS&P500droppingto2700in
coming months due to negative headlines about
trade,concernsabouteconomicdata,andlackluster
earningsgrowth,althoughthedeclinecouldbeeven
more pronounced in the event of a full-fledged
“growthscare.”Thatsaid,sheexpectstheindexto
rebound to 2950 by year-end in a trading pattern
similartolastDecember’sselloffandrebound.“We
could lose 10% on the S&P 500”—or 15% to 20%
fromJuly’speak—“thenfigureoutthatthingsgota
bit overdone,” she says.
State Street’s Lacaille is less enthused about
equities in general, citing similar concerns, but
recommendsoverweightingU.S.stocks.Hisyear-
end S&P 500 target is 2917.
“If there are any positive returns to be had in
the U.S., they’re going to be pretty modest, given
that we aren’t expecting strong earnings growth,
anditishardtosubstantiateamultipleexpansion
that is driven by anything other than low bond
yields,”hesays.“Butthat’stolookatonlyoneside
oftheequationandnottheotherside,whichisthat
bond yields are falling because the outlook for
growth and therefore earnings is getting worse.”
Arangeofmarketoutlooksalsomeansdiversity
inviewsaboutindustrysectors.Lakos-Bujasnotes
thatindustrialandenergysharesaremostexposed
toglobaleconomicandtradedevelopments.Butthis
issowellunderstoodbythemarketthatthestocks
have been discounted to an unfair degree. “Valua-
tions in some of those sectors have fallen so much
thattherisk/rewardcouldeasilymoveintheright
direction if you have some improving sentiment
about trade,” he says. “And I don’t think it takes
much to move the needle because crowding in the
market, specifically high momentum stocks, is ex-
treme.”
Nuveen’sMaliklikes“defensivegrowth”names,
including Merck (MRK) and Coca-Cola (KO),
which she sees delivering higher earnings while
being less dependent on the economy’s strength.
She points to Merck’s strong franchise, loaded
drug pipeline, and opportunity to expand profit
margins for products with limited competition.
Meanwhile, a new management team is trying to
broaden Coke’s product line, organically and via
acquisitions. Malik expects mid-single-digit reve-
nue growth to boost profits at both companies.
Withinthetraditionaldefensivesectors,shead-
vises avoiding overpriced and crowded names.
“Wheninvestorsbecomefearful,theytendtolook
forconsumerstaples,utilities,REITs[realestate
investmenttrusts],”Maliksays.“Theissueisthat
[the stocks] become very expensive very quickly,
given their growth rates.”
Calvasina wouldn’t shun real estate, consumer
staples, and utilities, despite their high valuations.
SheviewsthemaslargelyinsulatedfromtheU.S.-
Chinatradewarandsaystheywouldn’tfacemuch
risk if a progressive Democrat wins the 2020 elec-
tion—somethingshethinksinvestorsareunderesti-
mating.Inaddition,manyofthesestockshavesub-
stantialyields,anddividendpayershavedonewell
when the Fed is easing.
Calvasina also recommends financials, which,
like industrials, are cheap. “It’s clear that finan-
cials aren’t going to work when economic con-
cerns are high,” she says. “You’re going to have
to weather some bumps for a while. But in volatile
markets like this, where things can just turn on
a dime, we don’t want to abandon the cyclical
trade.”
Whenfacedwithasmanycross-currentsasnow
exist, and a market that can plausibly soar or
plummet, it’s crucial to remain flexible. Says
Lacaille: “When you’re entering a period of
greateruncertainty,youneedtheoptionofchang-
ing your portfolio, particularly as we get into the
end of the year.”
S&P 500 2924.58 16.7%
Dow Jones Industrial Average 26,362.25 13.
Nasdaq Composite 7973.39 20.
Russell 2000 1496.72 11.
STOXX Europe 600 376.74 11.
Nikkei 20,460.93 2.
Shanghai 2890.92 15.
MSCI Emerging Markets Index 970.08 0.
Bloomberg Barclays U.S. Agg. Bond Index 2230.85 9.
10-Year Treasury Yield 1.49% -1.19*
U.S. Dollar Index 98.51 2.
TR/CC CRB Commodity Index 172.08 1.
Cboe Volatility Index (VIX) 17.88 -29.
WTI Crude Oil (per barrel) $56.71 24.
Gold (per troy ounce) $1527.63 19.
AStrongYear,SoFar
Lower yields have offset trade concerns, leaving U.S. stocks higher year to date.
8/29/19 YTD
Close ChangeNote: YTD % change for foreign markets in local currency; *Change in percentage points
Source: Bloomberg
Divergent Forecasts
Wall Street strategists don’t agree on prospects for the U.S.-China trade war, the economy, or corporate
earnings through year-end. Their S&P 500 targets range from 2700 to 3100, with a mean of 2933.
Lori
Calvasina
RBC Capital Markets
2950
$
2.4%*
1.75-2.00%*
2.15%*
Real Estate,
Consumer Staples,
Financials, Utilities
Tech, Consumer
Discretionary,
Materials, Communi-
cation Services
Edward
Yardeni
Yardeni Research
3100
$
2.40%
1.50-1.75%
1.50%
Consumer
Discretionary, Tech,
Health Care
Financials, Energy,
Materials
Richard
Lacaille
State Street
2917
$165**
2.30%
1.50-1.75%
1.25%
Tech, Real Estate,
Industrials
Financials, Consumer
Discretionary, Com-
munication Services
Dubravko
Lakos-Bujas
J.P. Morgan
3000
$
2.10%
1.75-2.00%
1.95%
Tech, Consumer
Discretionary,
Industrials, Energy
Healthcare, Utilities,
Consumer Staples,
Real Estate
Saira
Malik
Nuveen
2700
$
2.25%
1.50-1.75%
1.60%
Healthcare, Consumer
Staples
Materials, Financials
2019
S&P 500 Target
S&P 500 EPS
S&P 500 P/E
U.S. GDP Growth
Fed Funds Rate
10-Yr Treasury Yield
Overweight Sectors
Underweight Sectors
*RBC forecast
**Brokerage consensus