US Equities 1Q19: Increase resilience

We advocate a less cyclical and more defensive tilt for 2019
Chief Investment Office08 Jan 2019
Photo credit: AFP Photo

US equities endured a volatile 2018 as the twin headwinds of a trade war and rising rates weighed on sentiment. Still, the market managed to squeeze out 0.5% gains on a dollarbased total returns basis (as of December 2018) as US fundamentals continued to remain strong, especially relative to other markets. Europe and Japan, for instance, were down 14.7% and 10.2%, respectively while the EMs lost 14.8%. In 2019, we expect volatility to stay elevated given the advanced stage of the market cycle. But the good news is, investors will be starting the new year on more stable footing from a valuation perspective.

The brutal selldown last October resulted in market valuation becoming less unattractive. To put things in perspective, we compiled the annual change in valuation for the S&P 500 Index over the years and concluded that the October correction was the fourth-largest decline since 1991 (Note: In this study, the 2018 data is calculated on a year-to-date (YTD) basis until October).

Historically, after a year of sharp contraction, valuation for the S&P 500 would undergo substantial expansion in the subsequent year. Out of the six occasions where valuations fell by more than 10%, four occasions saw valuations undergo substantial rebound. In fact, on average, a 18% contraction in valuation was followed by a 10% expansion in the following year.

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