The NCAA Final Four is set. On the men’s side, Auburn, Michigan State, Texas Tech, and Virginia are headed to Minneapolis to determine this year’s college basketball national champion. On the women’s side, UConn and Oregon punched their tickets over the weekend while the other two spots will be decided tonight—Baylor and Notre Dame are the favorites.
In that spirit, our weekly commentaries discuss our “Final Four Factors” for the markets and economy over the balance of the year. In today’s Weekly Market Commentary, we share our “Final Four Factors” for the stock market in 2019: policy, the economy, rates, and profits. While we expect a hard-fought battle between these factors and, with it, some market volatility, we still see the potential for further gains for stocks this year. However, given recent strength, the risk-reward trade-off for U.S. equities has become less attractive, as we wrote last week, and we recommend a market weight equities allocation for appropriate strategies. The Weekly Economic Commentary looks at the four biggest catalysts we think could jump-start economic growth.
FACTOR #1: POLICY
Policy is our top seed because of its importance in potentially extending the business cycle. Considering monetary policy’s limitations with the Fed pausing its rate hike campaign (more on that below), the onus is on fiscal policy to support the durability of the economic expansion. Last year’s package of additional government spending of roughly $300 billion over two years (2018–2019) is still giving the economy a boost. Corporations and consumers are saving more in their taxes this year than in 2018. We think the full impact from capital investment incentives that were part of the December 2017 tax reform has yet to flow through, particularly as corporations repatriated roughly $700 billion in overseas profits last year.
However, tariffs and ongoing trade uncertainty have pulled in the opposite direction, dissuading companies from making long-term investments. We continue to expect a U.S.-China trade deal within the next couple of months, as key players—including President Trump—have expressed increasing optimism recently. Both sides clearly want a deal: Trump wants to boost his reelection chances and China wants to support its economy. Although an agreement may be largely priced in to stocks, some tariffs could be rolled back, presenting a possible upside surprise.