Investment Strategist Says It’s Time for a Defensive Approach

Brian Nick is the chief investment strategist for Nuveen, a global investment management firm.

Where do you see the U.S. stock market heading for the remainder of 2019? Investors have enjoyed a 15% gain from the U.S. market already this year. It’s reasonable to expect something close to that for the calendar year. I’d expect the climb from here will be a lot tougher, and less steep. Choppy and frustrating are two words we’d use to describe the market. We see Standard & Poor’s 500-stock index ending the year between 2850 and 2900.

How should investors respond to another flare-up in the trade war with China? It would be very hard for stocks to make much headway, broadly speaking, if we’re still talking about this being as much of a risk in December as it is today. There aren’t that many good options for investors. You can wait it out and go into the stocks that have done the worst, hoping for a deal between the U.S. and China. You can go into the ultra-defensive parts of the market not as affected by trade and hope that you can reap higher dividends. Or, you can go to a less risky asset class such as Treasury bonds, which have rallied, or cash, which still is not offering very good rates of return. For us, it’s probably going to be a turn toward a more defensive approach to stocks, which is where we were orienting ourselves already.

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What’s your strategy? We haven’t dramatically reduced risk, but we’ve made some market-sector changes at the margins. We’re not looking for uber-defensive stocks or embracing the most economy-sensitive stocks. A mediocre but positive economic-growth environment translates into better returns for the growthier part of the market, but we’re rotating from economy-sensitive growth into defensive growth. That means we’re more cautious and discerning when it comes to tech; it’s inextricably linked to supply chains and trade in China. We’re putting more in health care and in consumer stocks, particularly consumer stocks that are not linked to China. We’re also rotating slightly into value-oriented stocks, especially financials.

Why those sectors? Health care checks a lot of boxes. The companies are high growers, but also somewhat defensive. They’ve gotten hit by the early political winds of the 2020 elections. Concern about legislative policy has led to an abundance of caution, but we’re not convinced you’ll end up with radical change on the health care front. The U.S. consumer still looks pretty strong, with high savings rates, strong household balance sheets and, recent market action notwithstanding, a positive wealth effect from stock gains this year. That should leave consumer spending well supported. We’re looking for consumer companies with more domestically driven profits. In terms of value, financials are up there. They’re not subject to tariffs as much—banks and insurance companies don’t trade a lot of goods overseas. And we’re looking for a bit more optimism. The economy looks okay, and we see more appetite for borrowing.

What other themes do you see playing out in the second half of the year? I’m a little concerned about the fall. The U.S. debt ceiling needs to be raised, a federal budget needs to be passed, ap­propriations need to be made, and the government needs to be kept open. Of these, the debt ceiling is the biggest concern, in terms of how radioactive it can be for the stock market. If there are even rumors of delays or skipped payments, it will be a big deal for the market.

What’s your take on international markets now? The only place where we have a tactical preference is emerging-markets stocks. They are reasonably valued, with earnings expectations that are so beaten down that they’re likely to be exceeded. But emerging markets are also undeniably a bet on at least a truce in the trade war, if not on a comprehensive U.S.–China deal. If that doesn’t happen, it would also be perilous for other developed markets such as the eurozone, which has a lot of exposure to China.

That said, emerging markets are better positioned to withstand a trade war than they were in the middle of last year, as tariffs were rolling out. Chinese economic stimulus is still coursing through emerging markets, and interest rates are lower across the board, while economies such as Brazil and India are generally doing a bit better. We’re hoping that some of the trouble spots on the periphery of emerging markets, such as Argentina and Turkey, will do better as policy makers address currency and inflation crises. If we had to rank the markets, we’d put emerging markets first, the U.S. second and developed international markets third.

When will this economic cycle, and with it, the bull market, come to an end? You tend to see recessions when the economy is growing a bit too fast and there’s rapid financial and monetary tightening—that’s what it felt like we went through last year. It felt like a soft landing. I think of the U.S. economy as a little like a Slinky, after one of my kids has stretched it all out. We don’t have rapid ups and downs. Instead, the cycle is stretched out and a bit smoother; economic volatility is very low. As long as growth stays positive, in general you’ll have positive returns. As long as the economy is moving, you’ll be rewarded for taking risk. You need to have that conviction to stay invested. Just don’t expect that you’ll be rewarded as much as you have been over the past 10 years.