Starting today, we’re launching a weekly question-and-answer session called The Big Interview, whereby I interview one of our top analysts about investing. I’ll pose timely questions, to glean the interpretive analysis you need to intelligently manage your portfolio.

Tired of the regurgitated conventional wisdom you find in the mainstream financial media? This weekly Q&A will provide original insights to help you make money in the markets.

For this week’s interview, I sat down with Scott Chan (pictured here), lead analyst for Real World Investing and The Complete Investor.

Scott also contributes to our flagship publication, Personal Finance. We discussed a wide variety of topics, including tariffs, interest rates, emerging markets, “black swan” events, and more.

Q: The U.S.-China trade war is taking a toll on global growth. Many multinational corporations dependent on trade are downgrading profit forecasts, citing the costs of tariffs. How serious a threat is the trade war? Are investors too worried, or not worried enough?

A: The U.S. and China are the two largest economies and the two biggest trading nations in the world, so a trade dispute between the two is no laughing matter. The question is how far the tit-for-tat will go. The two nations have slapped tariffs on a combined $360 billion worth of goods so far. As big as the number is, it is still tolerable. It’s the possibility that the situation could escalate much more that scares investors.

The U.S. has arrested Huawei’s CFO (who also happens to be the founder’s daughter) and charged her and the giant electronics maker with fraud and money laundering. This has the potential to raise the stakes to a different level.

The risk is real and investors should be concerned. However, it’s in neither nation’s interest to cross the line of no return. It’s a high-stakes game of chicken that will likely take a long time to play out.

I don’t think there’s a need to do anything drastic as far as investments go, but it’s definitely a situation that needs to be closely monitored.

Q: Wall Street has been encouraged lately by the Federal Reserve’s unexpected dovishness on interest rates. Fed Chair Jerome Powell reversed his previously tougher stance and indicated that the Fed will tread more cautiously on monetary tightening. What’s your view on the direction of interest rates this year and accordingly, how should investors position their portfolios?

A: Even though the Fed sometimes tries to portray its decisions as being independent of market action, the reality is that the Fed doesn’t operate in a vacuum so it’s not surprising to me that the central bank has changed its tune.

At this point, I would be surprised if we see the Fed hike the federal funds rate more than once in 2019. Chances are good that the Fed will actually stand pat all year. The caveat, of course, is that the Fed’s stance can change in response to economic conditions.

Stocks offer much better protection against inflation than bonds and other fixed income instruments. Companies with growing dividends and strong cash generation are especially preferred. Some traditional income-oriented investments suffered when the market believed interest rate increases would accelerate, but provided the company is high quality, there’s no need to sell.

Q: The stock market experienced a rough 2018, especially compared to the robust gains of 2017. Equities got particularly clobbered in the fourth quarter. Is the correction largely behind us or do you see further pain ahead?

A: To give an idea of how unusual the end to 2018 was, it was the first time in the history of the S&P 500 that the index entered the fourth quarter in positive territory but finished the year in the red.

I believe the stock market overreacted in the fourth quarter. The strong January we just experienced is evidence of that. However, the concerns are legitimate.

The trade war truce ends in the beginning of March. If no deal is done by then, tit-for-tat higher tariffs may happen again. Market sentiment has swayed day to day in response to the news flow. Talks between the U.S. and China are underway. Dialogue is a better sign than no dialogue at all, but we’ve seen false starts before and there is no guarantee anything of substance will come of the talks.

Europe has the feel of another crisis waiting to happen. It doesn’t necessarily mean that turmoil on the Continent will cause a market crash, but there’s a good chance it will make investors sweat again.

Remarkably calm years like 2017 are rare. Short-term ups and downs in the stock market are normal. The key is to invest in quality companies that can weather downturns.

Q: The broader market seems to be in the midst of a rotation from overvalued growth stocks to value plays. Would you agree? Generally speaking, which sectors offer the most compelling values right now?

A: I would somewhat agree. The market expectation for growth has weakened. Stocks that didn’t get much love while those with high price-to-earnings ratios were flying are now getting a renewed look.

The sector that looks the most interesting to me now is energy. It was the worst performing S&P sector last year and investor sentiment is still low. Energy stocks as a group are now trading at historically quite low levels and there are different ways the sector could get a sudden boost in 2019—disappointing production numbers or intentional production cuts, geopolitical disruption, or higher-than-expected demand, just to name a few.

Ironically, after the fourth-quarter selloff, the tech sector isn’t as overvalued as one may think. I wouldn’t chase tech stocks with sky-high valuations, but there’s some value to be found there as well.

Q: We’re now in the late stages of an economic recovery. Historically in these phases, which sectors have performed the best? Which look especially appealing to you?

A: We are in the midst of the second-longest expansionary phase in recorded U.S. history and we are only a few months away from setting a new record for the longest. This doesn’t mean that a recession is automatically around the corner, but it is natural to question when it will end.

Historically, when the economy slows and investors are looking for less economically sensitive investments, sectors like consumer staples, utilities, real estate investment trusts, and health care tend to hold up well. If inflation pressures rise, sectors like materials and energy tend to also do well.

Energy looks particularly intriguing to me at this time. Energy was the worst performing sector in 2018 and energy stocks have fallen to very low valuations compared to historical norms.

There’s no guarantee that 2019 won’t be another bad year for energy because a lot of unpredictable variables can impact oil prices, but based on the overly low market sentiment on energy and the potential for a strong rebound, I view the energy sector as a potential source of big 2019 gains for investors with higher volatility tolerance and some patience.

Q: Emerging markets have taken it on the chin in recent months, particularly those riven by political turmoil such as Brazil, Venezuela, and Turkey. Will overseas markets bounce back in 2019 and if so, which ones offer the greatest opportunities?

A: Emerging markets offer greater growth opportunities because they are behind on the development curve and have more room to grow, but they also tend to be unpredictable and volatile. After all, the MSCI Emerging Markets Index gained 37% in 2017 but has a negative return in four out of the last six years.

The geopolitical risks associated with emerging markets are particularly hard to quantify. In 2018, those emerging markets with high current account deficits and a large holding of U.S.-denominated debt were punished in particular.

Looking beyond the fear, emerging markets as a group aren’t in terrible fundamental shape. Many still have good growth outlooks so a positive year won’t be shocking. However, emerging markets are just so unpredictable that I usually don’t directly invest in emerging market stocks. If I want some exposure to emerging markets, I prefer to invest in international U.S. companies that have operations overseas.

That said, when I do invest in emerging market stocks, I only invest in the biggest emerging market of them all: China.

Yes, there is a lot of talk about China’s economic slowdown and perhaps hard landing, but those predictions have been going on for years and China is still standing. Growth is slowing, but a big part of that is the Chinese government’s effort to deleverage the economy and reduce excessive risk taking in order to make growth more sustainable. I believe Chinese tech stocks levered to the growing Chinese middle class offer excellent growth opportunities.

Q: As 2019 unfolds, what do you see as the greatest geopolitical threats to investors?

A: The ongoing U.S./China trade dispute is obviously a big deal. The two sides are talking and the market seems to expect some kind of agreement to stop additional tariffs, but the Trump administration is unorthodox (to put it mildly), so literally anything can happen. The charges against Huawei and the arrest of a top Huawei executive add additional uncertainties to the drama.

Europe is another area of concern. The Brexit negotiations have not been smooth. Prime Minister Theresa May barely survived a no-confidence vote but her Brexit proposal was rejected by the British Parliament.

Populist movements against the status quo have gained momentum and could challenge current EU policies and create uncertainties. A number of European governments have undergone or are undergoing upheavals. In recent years the EU and euro zone haven’t had a shortage of crises. It would not be surprising if 2019 brings more.

There’s always the looming threat of a “black swan” event that could disrupt the global economy and financial markets. These unforeseen crises could include the sudden failure of a major company, a terrorist attack, a war outbreak, you name it. The market is forward looking, and it’s usually able to discount known risks, but when significant unexpected events occur, the uncertainty tends to cause havoc.

Got any questions for our experts? Email me at: mailbag@investingdaily.com.

John Persinos is the managing editor of Investing Daily.