“Ask five economists and you’ll get five different answers,” said American economist Edgar Russell Fiedler. The rest of the quote is “—six if one went to Harvard,” but let’s not quibble about educational background.

Making predictions about the last half of 2019, there are differences in what people in the investment field suggest.

The first half of the year was excellent for investor returns, with the S&P 500 up 18.5%, developed country equities up 15%, and emerging markets up 11%, says David Kelly, chief global strategist for J.P. Morgan Asset Management in New York City. “This was well above the expectations we had coming into the year, especially after the severe market correction in the 4th quarter of 2018,” he adds.

Ed Farrington, executive vice president of retirement strategies at Natixis Investment Managers in Boston, speaking from the perspective of a retirement plan investor, says anytime there are double-digit returns, it is a positive. If exposed to equities, retirement plan participants are really pleased because their balances have gone up.

However, the outlook for the second half of the year is not as good. Kelly says, “Looking forward, we are modest in our expectations.” He explains that stocks are starting from an expensive price to earnings (PE) ratio—stock prices are at about 17 times expected earnings. And, bonds aren’t cheap either, and the 10-year Treasury bond only pays 2% below inflation. “Because of that, plan sponsors and participants need to dampen down expectations of returns going forward,” he says.

During a video conference, Omar Aguilar, Ph.D., chief investment officer of equities and multi-asset strategies, Charles Schwab Investment Management, Inc., said investors are confused and cautious because they’ve been on a rollercoaster. In 2018, they ended in the same place they started due to the strong market correction in the fourth quarter—especially in December. “After a correction stocks can go to all-time highs. People call it the most unloved rally because they have nightmares from before Q4,” he said. “Outside of the [Federal Reserve] actions, everything else is the same as what it was back before the correction.”

Robert C. Doll, chief equity strategist and senior portfolio manager at Nuveen, in “Bob Doll’s 10 Predictions for 2019: 2Q update,” says, “We are in unbelievable cross currents with investors trying to figure things out.”

What Aguilar said about investor nightmares rings true when one looks at the Alight Solutions 401(k) Index. May was the 16th consecutive month that retirement plan participants favored fixed income investments in their trades.

A fear that both economists and investors share is that the country is headed into another recession. Allianz Life’s Quarterly Market Perceptions Study found 48% of Americans fear a major recession, and 47% fear a major market crash.

During the Schwab video conference, Liz Ann Sonders, chief investment strategist, Charles Schwab & Co., Inc., said, “With 100% certainty, we will get a recession. Trade is the most important needle mover to timing.” She said if the U.S. is on that path, the peak will be in the first quarter of 2020. She said the trade war will offset business confidence gained by corporate tax cuts, and absent a comprehensive trade deal businesses will not be reignited. She also cited an inverted yield curve as a sign of an impending recession.

However, other economists are not as certain about a recession. Farrington says the trade war tariffs and the slowing of global economic growth are increasing fears that a recession could happen, but Natixis’ chief strategist says there’s a 30% chance.

In an Investment Strategy Overview, Christopher Hyzy, chief investment officer at Merrill, a Bank of America company, says market watchers believe the U.S. is the late stages of the business cycle with a rising probability of a recession. However, he says “We believe there have been a series of ‘mini waves,’ and we are in the early to mid-stages of the fourth mini wave since the Great Recession. Our view is largely based on current economic conditions, many of which are not typical of a cycle’s late stages historically.”

According to Hyzy, the inverted yield curve (a typical indication of recession) is due more to declining inflation expectations and growth expectations, and the weight of negative bond yields in Europe. “If the Fed begins an easing campaign, the short end should begin to turn downward, changing the shape of the overall curve,” he says.

Kathy Jones, chief fixed income strategist, Schwab Center for Financial Research, said during the video conference that if the stock market goes into a correction, Treasuries are investors’ best bet. They should have some duration but also be high quality.

“We favor shorter-dated yields, given the flat to inverted yield curve. We could take advantage of downswings in the market by deploying cash when warranted,” Hyzy says.

However, Brett Wander, CFA, chief investment officer of fixed income, Charles Schwab Investment Management, Inc., said the Federal Reserve will meet at the end of July, and the last thing it wants to do is have market pricing one thing and do something else. “In 80 out of 80 meetings, the Fed has done what the market is doing, so a rate cut is possible,” he said, adding that he expects three by the end of the year. For this reason, Wander said using fixed income to offset risk in equities may not be what investors want to do.

While Farrington says Natixis believes there will be positive returns in the next six months, still, there are “storm clouds on the horizon that may cause some trepidation.” Robert C. Doll, chief equity strategist and senior portfolio manager at Nuveen, in “Bob Doll’s Ten Predictions for 2019: 2Q update,” says, “We are in unbelievable cross currents with investors trying to figure things out.”

Farrington says retirement plan advisers know there’s always a bump in road. “Sometimes it’s not something we hear in the news every day that causes volatility, it’s something not on the radar screen,” he says.

Hyzy offers some examples in his Investment Strategy Overview. A potential drop in business confidence could lead to lower job growth and, ultimately, lower consumer confidence and spending. If consumer spending pulls back, then the need for liquidity may rise. He adds that at that point any areas with very high exposure to illiquid assets or an excessive need for financing could have liquidity issues.

Another item of risk not widely discussed Hyzy offers is the “weight” of deflation. “Deflationary risks, in many cases, are more difficult to turn around than inflationary risks. This is where companies have less pricing power, which could lead to anemic financial institutions around the world, a drop in lending velocity, a sharp rise in savings, productive capital exiting the broader economy, and the potential for a negative feedback loop—a self-reinforcing system—so to speak, with these factors potentially driving a further reduction in inflation,” he says.

Suggestions for investors

Wander pointed out that on the equity side, passive investing has taken over, and on the fixed income side, even more so. His personal bias is towards the passive side, especially since active managers use yield to add value. “A Wall Street commentator said, ‘More money has been lost reaching for yield than at the cap of a gun,’” he noted. “Most typically when investors reach for yield, they are doing so in credit markets. In the past, if they wanted a 5% yield, they could do that with Treasuries. But now they may have to go into the high-yield market. Does it make sense to take on increasing risk to get higher yield? I don’t think so.”

However, Hyzy says Merrill believes active investing is outperforming due to wider dispersion and the uptick in volatility, and it expects this to continue. “We favor a hybrid approach, with a mix of active and passive investing across asset classes,” he says.

“Some believe the global market provides a larger breadth of opportunity for risk adjusted returns, but lately that has not been case,” Aguilar noted. He pointed out that out of the last 10 years, the U.S. has led the markets, but currently, among the top 50 stocks, 75% are those of non-U.S. companies. In addition, he said, “Emerging markets 12 years ago were only 3% of global capitalization, now it’s 13%. The 15% average allocation most U.S. investors have in emerging markets, the thought is to double that, but investors still have to think about currencies and the expense of trading in global markets.”

However, Hyzy says Merrill favors U.S. large caps versus the rest of the world, and investors should continue to have a mixture of value and growth. “Value in the long term but growth has the wind at its back in the near term,” he says. While emerging markets could have flashes of strong performance if concerns over global trade wane, he warns it could be tough to sustain that view, given geopolitical uncertainties over global trade that continue to present themselves.

Doll suggests portfolios include companies that benefit from the economic cycle and show they are reinvesting in their business. He also suggests looking into companies with extras to offer, such as a new product with the ability to raise prices. He suggests investing in companies with most of their business in the U.S., and be underweight in international companies.

One thing economists can agree on is that when investing for retirement, staying disciplined and focused on the long-term is important.

Aguilar said it doesn’t matter what’s in the headlines,. Investors need to ask: Has something happened to change my strategy, and is it something that changes dramatically my risk tolerance? He said it is very rare something will happen to change a retirement investor’s long-term strategy. “With Brexit, doing nothing was the right idea, and with U.S. elections doing nothing was the right idea,” he pointed out.

Kelly does suggest that retirement plan advisers should point out to participants that if they have a lot of money in stable value and cash, they are paying more now. And, since the Fed is expected to cut interest rates, participants shouldn’t regard cash as a long-term investment.

“What’s critical is we live in a world of short termism and new cycles defined in 12 or 24 hour chunks of time” Farrington says. “But a retirement plan is for the long-term, so participants need to be reminded that their time horizon is defined in decades.”

“History is a great friend when it comes to communicating to plan participants,” Farrington adds. “I often remind myself that my job keeps me focused on the stock markets, but most people are focused on their own jobs. He says it is important to communicate historical lessons to plan participants. A great one comes from the 2008-09 financial crisis. “Some participants’ balances went down 35% to 40%, and they may have panicked and moved to safer strategies when, in fact, the next year markets went up significantly,” he says. “Especially equities will experience ups and downs, but history tells us the return trade-off is favorable. Historical lessons help people stay patient.”

Kelly says, “The message should never be to time the market for retirement plan participants. Constantly switching investments hurts people.” He also suggests that advisers make sure participants don’t just invest in what they are familiar with and don’t overweight their portfolios in bonds. Advisers should also suggest participants invest in emerging market and international equities, letting them know that the volatility will wash out and provide good returns over the long term.

One final note Farrington makes is that where both performance and demand are starting to find common ground is in environmental, social and governance (ESG) investments. “We’ve seen a growing demand from plan participants for more ESG, and at the very same time, there is an emerging body of evidence that companies with strong ESG profiles are stronger and more stable,” he says. “When [defined benefit and defined contribution] plan sponsors think about the volatility expected in the second half of the year, ESG is a consideration due to its strong investment profile in uncertain markets. Participants may be on to something.”