Jennison Associates 4Q 2019 Outlook

Healthy U.S. consumer continues to offset headwinds from trade tensions and political uncertainty.

October 14, 2019

U.S. equities markets remained volatile in the third quarter, unsettled again by trade discord. At the end of June, investors appeared relieved that no additional tariff increases had been announced or implemented. The respite was short-lived, however, as the lack of tangible progress in U.S.-China negotiations, followed by new threats and escalating rhetoric, rekindled worries. Despite the trade tension and uncertainty, U.S. markets managed modest gains in the quarter and advances through 2019’s first nine months were in the double digits. Developed Europe & Middle East lost around 2% in aggregate, while emerging markets declined around 4.3% in the third quarter.

Jennison Associates’ Growth team does not forecast a U.S. recession. However, the trade war has already claimed casualties in industries most directly exposed to existing tariffs. Without clarity or a new agreement with China, the fallout from trade restraints already implemented will increasingly weigh on business confidence and consumer spending, as moves are taken to mitigate and pass on the increased costs of doing business. With this uncertainty, business planning and investing are likely to be hampered, with delays and hesitancy in spending probable. The U.S. political landscape is likewise unsettled and apt to weigh on confidence and activity, as impeachment proceedings against President Trump begin and the 2020 election cycle ramps up. The most powerful offset to these headwinds is the health of the U.S. consumer. Employment remains strong, and incremental wage gains continue. Consensus projections of U.S. GDP growth—1.5%-2.0% for the year—were essentially unchanged.

At a glance – Jennison Associates’ equity sector views as of September 2019

In the quarter and for the trailing one year, defensive sectors such as utilities, real estate, and consumer staples led. Along with information technology, these are also the best-performing sectors year to date. Longer term, growth sectors such as information technology and consumer discretionary are the best performing. Energy is the weakest sector for all time periods.

Jennison Associates 4Q 2019 Outlook



Information Technology

Information technology was the best-performing sector in the S&P 500 Index in the first three quarters of 2019, advancing more than 31%. The market continues to favor companies with faster organic growth in this low real GDP-low rate/inflation environment. Tech stocks remain reasonably valued. As of September 30, 2019, the S&P 500 Index’s information technology sector’s next-12-month P/E of 19 was modestly above the 17 for the S&P 500 Index. Reasonable relative valuations continue to be driven by the sector’s overall stronger ROEs and free cash flow generation, often as a result of innovative and disruptive product offerings.


We are assessing companies that we believe can continue to grow in a slowing global growth environment. This includes U.S. wireless tower companies who stand to benefit as carriers spend to meet the burgeoning growth in mobile traffic and the implementation of 5G.

Health Care

Through the first three quarters of the year, the health care sector of the S&P 500® Index advanced 5.6%, underperforming the overall index, which rose 20.6%. We view the sector’s multi-year outlook positively based on a range of industry trends, especially the innovation occurring across a broad range of company types, products, and business models. However, the biotechnology and pharmaceuticals sectors continue to be affected by continuing political campaign discussions of, and competing proposals to address, drug pricing.


We see the life sciences tools and services and health care equipment & supplies sectors as more resilient to macroeconomic, political, and policy-related headwinds. Biotechnology companies in China, where drug-pricing issues are uncorrelated to U.S. developments, also represent an opportunity.


Shares of the S&P 500® Index’s financial sector have performed mostly on par with the broad market so far in 2019. Valuations also remain compelling with the sector currently trading at a P/E of 12x versus the S&P 500® Index at 19x based on 2019 estimated earnings. While slower global growth has led to multiple contraction in cyclical and rate-sensitive industries such as financials, certain areas can be relative safe havens in this environment.


We believe areas with outsized growth, such as financial technology, can be sources of additional alpha generation. Financial technology companies, such as payment processors, were able to buck the broader industry trend and outperform recently with their secular growth profile and business models less exposed to the economic cycle.

Midstream Infrastructure

The midstream infrastructure sector as measured by the Alerian MLP Index gained 11.08% year-to-date, outperforming the broader energy sector within the S&P 500® Index. Midstream companies reported decent second quarter 2019 earnings results, with strong distributable cash flow (DCF) per share nearly 10% higher versus the same period last year. While the market has shifted its focus on trying to assess the impacts from exploration and production (E&P) companies’ 2020 capital decisions (e.g., production and capex spending), Jennison believes select midstream stocks should continue to see an inflection in free cash-flow growth into 2020 and beyond as new projects get placed into service and volumes continue to rise.


We favor firms with integrated business models as they have higher barriers to entry and offer the lowest cost infrastructure from the wellhead to the burner top—by providing gathering & processing, transportation, and the storage & delivery of hydrocarbons to end users and to export markets.


The utility sector has been the best-performing sector within the S&P 500® Index over the last 12-month period ended 9/30/2019, posting returns of 27.10%, outperforming the broader market (S&P 500® Index) by over 2,280 bps, given the uncertain macro environment and the shift in market sentiment to defensive stocks. We believe the utilities sector represents a compelling value proposition for investors in a slowing growth and falling global bond yield environment given its defensive characteristics; stable, high dividends; and strong longer-term growth areas like renewables. We currently favor industries and sub-industries such as regulated utilities, renewable electricity, gas distribution companies and communications infrastructure.


We see continued momentum across multiple fronts that support ongoing investment and usage in renewable electricity, providing unique investment opportunities over the long term. Improving economics in renewables such as wind and solar power remain a growth driver for the overall sector. Companies now have renewables incorporated into their capex strategy plans (versus five years ago when renewables weren’t included)—allowing those utilities to earn a regulated rate of return on their renewable investments.

For more details, read the full Market Review and OutlookPDF opens in a new window, which is available for financial professionals.


The views expressed herein are those of Jennison Associates investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither Prudential Financial, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation.

Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.

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