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Principal Point of View: 2019 Outlook

Principal® Point of View analyzes financial news and trends face to face with our internal experts in a monthly roundtable discussion. Panelists highlight issues to help keep advisors up to date.

Earn the trust of your clients in a time of volatility

december 2018 POV skyline

A view of downtown Shanghai: The U.S.-China trade war — currently under a truce — is a major factor in the global economy for 2019.

December 2018 Panel

  • Robin Anderson, senior economist, Principal Global Investors
  • Bob Baur, chief global economist, Principal Global Investors 
  • Brett Fisher, product manager, Principal 
  • Mark West, assistant vice president, Business Solutions, Principal 
  • Heather Winston, assistant director, client relationship, direct to consumer

The market volatility widely expected to dominate 2019 got an early start before the holidays.  

volatility is actually a chance for advisors to prove their mettle in 2019We’re a decade beyond the Great Recession and in the middle of a three-month truce in the U.S.-China trade war. And Wall Street seems to be feeling the jitters.  

Bob Baur, chief global economist, says the U.S. may see “a moderate, kind of a run-of-the-mill bear market next year, a 25- to 30-percent decline. Not many people share that view. We could still have that and end up flat for the year, but I think that’s the kind of volatility that’s possible.” 

And don’t forget that the “new NAFTA,” the United States-Mexico-Canada Agreement, still must be ratified by each nation.

But our panelists at Principal have the expertise to make a valid  — and ultimately positive — point: Volatility is actually a chance for financial advisors to prove their mettle in 2019.

“If markets go nowhere next year, it can be even more important to find an active manager who can ferret out value and profits,” Baur says. “The current craze with passive investing works wonderfully when there are big long-term trends, but there aren’t any now. And so passive investing is likely going to lose some of its luster as the year goes on.

Heather Winston, an assistant director for consumers who also has an advisor background, agrees that advisors and businesses should be ready to seize the opportunity in volatility.

“If you’re unprepared for that, or if you haven’t thought about it or if you’re managing money for someone, now is the time to brush up on your skills, because it’s coming fast and furious,” she says.

The effects of the recent midterm elections—with Democrats retaking control of the US House of Representatives—will sweep through all our lives, financial or otherwise, in the coming year.

To help you prepare, here's what our Principal POV Panel anticipates seeing in 2019.

Interest Rates

Higher rates may be “great for savers,” says Robin Anderson, senior economist with Principal Global Investors, “but they’ll be a little bit of a challenge if you want to buy a house or car.” But it’s possible that long-term interest rates already have peaked, so your clients may not need to rush and try to buy a home earlier in 2019 than they originally planned. Principal Point of View Headshot for December 2018

Investments

This probably is the year for your customers to adjust to a more conservative portfolio, especially if they're closer to retirement. A real estate investment trust or commercial real estate investment might have less volatility, Baur says, than stocks or corporate bonds.

Employment

Your clients may not need to worry too much about their jobs. Anderson expects the labor market to stay strong in 2019 and enjoy wage growth (as high as 3.5 percent by midyear, according to Baur). If inflation stays under control, that also could translate to higher real incomes for your customers, maybe giving them more flexibility to invest. One caveat: Anderson is monitoring a recent uptick in jobless claims, which may or may not be an early sign of weakening employment.

Small Business

Thinking about starting or advising a new business? One focused on consumers— assuming continued job and wage growth — might be safer than a business more directly tied to the markets. But Baur, mindful of the example of how the depths of the Great Recession turned out to be a good time to launch a business, also would remind your clients of Warren Buffett’s classic quote: "Be greedy when others are fearful and fearful when others are greedy."

Retirement

Any year is a good year to retire if it makes lifestyle sense for your clients, says Brett Fisher, a product manager at Principal. But 2019 does merit special financial consideration. If they’ve already been on the path to retirement and have enjoyed the last decade of robust returns, they’ve probably been feeling secure even when saving a little less. Now they may have to consider how contributing more to their 401(k) might help them stay on track, Fisher says. Especially if they're old enough to retire within the next decade or so. Advisors also should keep in mind: 2019 could see the beginnings of a serious shift away from low-cost passive investment options that dominate retirement plans, if more active investing becomes necessary to generate growth.  

Two simple strategies, back in style: education and savings

Because of the last decade’s bull market, many clients may have forgotten or not even encountered this sort of volatility. And advisors haven’t had as much need to educate them. This year, that likely changes. They may need basic education on how to behave — or at least how not to panic —  in the throes of a downturn. You may need to stop a client from cashing out at precisely the wrong time, Fisher says.

Reconsider basic savings: Savings rates have climbed in recent years, so now might be the time for more risk-adverse or cash-like investment options.

The last word

This month we leave you with inspiration from Mark West, assistant vice president for Business Solutions: “When times are tough or volatile, the advisors who are proactive will be the advisors who are successful.” 

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
The commentary represents the opinions of Principal Global Investors. It should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice.  No investment strategy, such as diversification, can guarantee profit or protect against loss.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392. Certain investment options and contract riders may not be available in all states or U.S. commonwealths.
Principal Global Investors leads global asset management and is a member of the Principal Financial Group®.
2018 Principal Financial Services, Inc. 689335-122018

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