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A review of midyear outlooks from a few major financial firms reflects significant caution about expectations, with results likely to be affected by central bank policy.

After a strong first half of 2019 that included the S&P 500 delivering the best first-half performance in more than 20 years, analysts are expecting several significant challenges to cloud the back half of this year, including ongoing trade and geopolitical issues, as well as declining bond yields.

Just how much the U.S. economy and U.S. stocks are hurt stands to also be determined by policies enacted by the Federal Reserve, they said.

“The second half of the year could be a bit bumpy given risks around trade, geopolitics, and reliance on central bank policies,” predicted John Lynch, LPL Financial chief investment strategist.

“History tells us pullbacks of 5–10% are quite common, while corrections of 10% or more are not rare by any means,” he said, noting his firm encouraged “suitable investors who may be under-invested to use volatility to their advantage to rebalance portfolios.”

LPL recently maintained its year-end fair value estimate on the S&P 500 of 3,000 in its Midyear Outlook 2019 report, he noted.

The “key change” in BlackRock’s outlook, meanwhile, is that it now sees “trade and geopolitical frictions as the principal driver of the global economy and markets,” the world’s largest asset manager said in its midyear 2019 global investment outlook.

BlackRock pointed specifically to the “escalation in trade conflicts” between the U.S., China and other major trading partners, adding that the “protectionist push” it’s seeing that includes tariffs creates “uncertainty around trade policy” and could harm business confidence and “discourage capital spending” in the near term.

There’s also a “longer-term risk” that the “unraveling of global supply chains delivers a supply shock that saps productivity growth, reinforces a slowdown in potential output and leads to higher inflation,” BlackRock said.

That led BlackRock to downgrade its growth outlook further and take a somewhat more defensive investing stance for the period, it said.

But BlackRock expects a “significant shift by central banks toward monetary easing to cushion the slowdown” — a policy “pivot” that it said “should extend the long expansion, we believe, and has already triggered easier financial conditions.” The Fed seems prepared to “counter the downside risks to growth” caused by trade conflicts, and other central banks, including the European Central Bank, have teamed with the Fed to ward off a slowdown, BlackRock said.

BlackRock remained positive on U.S. equities against what it said was a backdrop of “reasonable valuations.” Meanwhile, the “record-long U.S. economic expansion looks unlikely to run out of steam any time soon” despite the challenges, it said. While global growth will likely decelerate further, the global expansion will continue, with central banks “helping support looser financial conditions,” it said. BlackRock cautioned investors to take a “modestly defensive posture.”

There’s also been a “plunge in bond yields” that BlackRock said was “creating more challenges for investors in an already yield-starved world.” The firm is in favor of lowering some equity risk, keeping government bonds as “portfolio stabilizers,” and is “overall more positive on credit markets,” it said. But BlackRock turned more cautious on U.S. Treasuries in the short term because it believes “market expectations of U.S. policy easing have gone too far,” while it expects an “uptick in U.S. inflation in the months ahead,” it said.

Bank of America Chief Investment Officer Chris Hyzy also pointed to some of the same challenges in the second half of 2019 in the executive summary of that firm’s midyear outlook.

But his overall forecast was somewhat more optimistic than those of BlackRock and LPL, as well as the forecast recently given by Schwab.

“Rather than one long business cycle, we believe there have been a series of ‘mini waves,’ and we are in the early to mid-stages of the fourth mini wave since the Great Recession,” according to Hyzy. “Our view is largely based on current economic conditions, many of which are not typical of a cycle’s late stages historically,” he said, arguing “inflation is very low and actually falling, rather than being elevated and rising, as in a late stage.”

The U.S. dollar, meanwhile, has been strong for a while and, “although we believe it could stabilize or weaken slightly, we believe that would be due more to a strength ‘overshoot’ rather than to the rest of the world’s (ROW) closing the growth gap,” he said.

Another positive sign is that the U.S. consumer remains confident, he said. Although “many CEOs of global corporations seem to be growing less confident,” he chalked that up to “more about the exposure to economies outside the U.S.”

The inverted yield curve, which is “another typical indication of recession,” is mainly being caused by “declining inflation expectations and growth expectations, and the weight of negative yields in Europe (including Germany’s near-record low 10-year negative yields),” he said, predicting: “If the Fed begins an easing campaign, the short end should begin to turn downward, changing the shape of the overall curve.”

But he conceded that “big risks that are not being widely discussed” include a potential decline in business confidence, a drop in consumer spending and  government regulations on technology, which he said “could result in a domino effect across the corporate world, not just on the tech titans.” He also pointed to climate change as a “long-term risk” whose “destructive aspects may affect labor mobility, with areas of the country that are used to having vibrant workforces seeing the migration of jobs elsewhere.” While the latter risk is “likely many years away,” he said it was “one we should be mindful of as we close each year.”

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