Quarterly Investment Outlook - January 2019

Summary

• ‘Late cycle’ worries will keep coming back. Market volatility is correctly reading the several threats to the current economic expansion.
• The Federal Reserve is caught between headwinds for economic growth and late cycle pressures of limited capacity, pulling opposite ways. This makes a policy mistake more likely.
• Though US bond yields overshot on the way down towards the end of last year, our view is that they have very likely already peaked for the current economic cycle.
• Credit still faces daunting headwinds. Spreads have moved higher, but the rises have been modest by historic standards.
• Better high yield prices are not a buying opportunity given the effects of high leverage, weaker covenants and testing economic conditions.
• We now see the US dollar turning down sooner rather than later. Emerging market currencies are a probable beneficiary.
• Valuations are better, but we are inclined to continue seeing equity market rebounds as mainly an opportunity to reduce risk. ‘Buying the dip’ will no longer work.
• Low yielding government bonds could still be necessary protection in these volatile times. Private markets offer selective shelter too.
• The tendency for volatility expectations to run ahead of realized market volatility is potentially creating some opportunities.

To learn more about the Quarterly Investment Outlook for January 2019, download the full PDF above. 

^{Indices cannot be invested in directly. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect fees or expenses. Past performance is no guarantee of future results.}

^{The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.}

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^{Appendix: Index Definitions}

^{S&P 500 Index – The market-cap-weighted index includes 500 leading companies and captures approximately 80% of available market capitalization.
Russell 2000 Index - The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.
MSCI EAFE Index $ - The MSCI EAFE Index is designed to measure the performance of the large and mid-cap segments of developed European Australasian and Far East Markets. The index covers approximately 85% of the free float-adjusted market capitalization and is measured in USD dollar terms.
MSCI EAFE Index (Hedged) - The MSCI EAFE hedged Index is designed to measure the performance of the large and mid-cap segments of developed European Australasian and Far East Markets. The index covers approximately 85% of the free float-adjusted market capitalization and is measured in hedged dollar terms.
MSCI Emerging Markets Index – The MSCI Emerging Markets Index captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country and is measured in USD terms.
Bloomberg Barclays Capital Aggregate Index - The Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
HFRI: The Hedge Fund Research, Inc. Monthly Indices (HFRI) are fund-weighted (equal-weighted) indices. Unlike asset-weighting, the equal-weighting of indices presents a more general picture of performance of the hedge fund industry. Any bias towards the larger funds potentially created by alternative weightings is greatly reduced, especially for strategies that encompass a small number of funds. All single-manager HFRI Index constituents are included in the HFRI Fund Weighted Composite, which accounts for over 2000 funds listed on the internal HFR Database.}

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Aon Hewitt Limited is authorized and regulated by the Financial Conduct Authority.
Nothing in this document should be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial advice and action should not be taken as a result of this document alone. Consultants will be pleased to answer questions on its contents but cannot give individual financial advice. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.}

^{This Quarterly Investment Outlook is intended solely to report on various investment views held by Aon Hewitt Investment Consulting ("AHIC"). The opinions, estimates, forecasts, and statements of financial market trends are subject to change without notice due to changes in the market or economic conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for informational purposes only and should not be considered investment, accounting, legal or tax advice. It is not intended as an offer or a solicitation with respect to the purchase or sale of a security, and it should not be interpreted as such. Aon Hewitt Investment Consulting, Inc. is a federally registered investment advisor with the U.S. Securities and Exchange Commission. AHIC is also registered with the Commodity Futures Trade Commission as a commodity pool operator and a commodity trading advisor, and is a member of the National Futures Association.}