Market leadership in the coming years is likely to look much different from that prevalent over the past decade. The world economy has grown at one-half the rate of the average post WWII expansion and has been characterized by a series of rolling crises, deflation fears, unprecedented quantitative easing, and persistent risk aversion. The consensus view in the markets has gravitated around an outlook for secular stagnation (a condition of negligible growth potential) and low rates for as long as the eye can see.
This has encouraged investors to seek current income through long-term bonds, low quality credit, and safe dividend yielding stocks, such as utilities and consumer staples. Slow growth and instability overseas had encouraged a flight toward U.S. assets and companies capable of growing independently of broader economic conditions, all of which benefited the S&P 500, growth stocks (F.A.N.G.S. in particular), and the U.S. dollar.
When everyone is thinking the same way, it is often a good time to raise doubts. We believe a regime change is afoot and areseeing some signs of it this year. Today, the valuations of investments which have led the markets for much of the current expansion are expensive and provide little margin of safety (see left column in table below). Many portfolios are likely overweighted in these areas given popularity and return differentials versus others that have lagged (i.e. cyclicals, international,value styles etc.). The massive flight toward index-oriented strategies, which often accelerates as bull markets age, has added fuel to these hot trends.
As intuition might suggest, areas that have been left behind likely hold the most promise as we look ahead (see right column in table below). Leadership should transition toward these sectors at various points in the future. We believe the catalyst for changing leadership will be inflation and interest rate pressure in 2018-2019, stemming from tight labor markets, improvedglobal growth, and ongoing policy stimulus. This is likely to pose new and different challenges for the markets. As a result, investors should rebalance portfolios, set aside cash for upcoming spending needs, and consider emphasizing those sectors holding the most promise for the years ahead
DISCLOSURES: PAST PERFORMANCE DOES NOT PREDICT FUTURE RESULTS. This report is based on data obtained from sources we believe to be reliable. Hefren- Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions andestimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.