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.