Economic growth is slowing in the United States, and the slide is having a significant impact on the dollar. Investors are now looking to gold and growth stocks as a potential hedge against the decline.
Bernard Dahdah, a precious metals expert at the French Bank Natixis, has kept in mind that the weaker dollar is likely to result in higher gold prices. And although he doubts a full-blown recession is on the horizon just yet, there are a number of challenges that investors will be required to face in 2019.
Dahdah warned, “It promises to be a tricky year, with multiple risk factors (i.e. trade war) still prevalent that could prove disruptive,” Dahdah said. “Uncertainty is the only certainty.”
U.S. economic growth has been decelerating since late 2015, as have the balance estimates for U.S. business’ financial growth. This has traditionally been good news for growth stocks, but not value stocks.
Another expert, Ed Clissold from Ned Davis Research noted, “When economic growth has been scarce, investors have flocked to stocks that do not need the economy to grow to generate top-line and bottom-line growth,”
The opportunity in growth stocks
Goldman Sachs’ David Kostin has some information to prove Clissold’s theory. For nearly a decade, when U.S. economic growth– determined by Goldman Sachs’ Present Activity Indication (CAI)– has slowed by more than 0.5 portion points in a month, the bank’s internal basket of high-growth stocks– 50 S&P 500 business with the fastest anticipated 2019 sales growth within their respective sectors– has produced a median excess return of 0.35 percentage points a month compared with the S&P 500.
A friendlier Federal Reserve might help growth stocks jump further, states Kostin. The central bank has turned dovish in its financial strategy in 2019, signifying a pause in interest rate boosts and a possible end to the balance sheet reduction by 2020. This indicates the yield curve could remain depressed for longer.
A flat yield curve will negatively impact companies in the financial sector, due to the fact that a few of their profits come from borrowing short-term bonds and lending long-term ones to gather the rate gap in between. Considering that the sector comprises a significant portion of value stocks, these assets are likely to see a drag relative to development.
That isn’t to state there is no headwind for growth stocks. Growth companies are currently trading at higher valuations compared with history, restricting their potential for more outperformance. The marketplace has also seen some healing in commodity costs recently, which could drive the value-tilted energy and materials stocks higher. This could counterbalance a few of the other aspects preferring development, says Ned Davis Research’s Clissold.