For The Big Interview this week, I caught up with Jim Pearce.

Jim is the chief investment strategist of our flagship publication Personal Finance. He began his career as a stockbroker in 1983 and over the years has managed client investment portfolios for major banks, brokerage firms and investment advisors.

Jim [pictured here] is a veteran observer of the markets. You’ll find his answers a useful backdrop for your investment decisions.

Q: The current recovery is getting long in the tooth. Most analysts predict an economic downturn will occur in 2019 or at the latest 2020. What’s your view? Do we face a full-blown recession or a softer landing? How should investors prepare?

A: For a variety of reasons, I believe a soft landing is the most likely outcome. Despite persistently strong employment data, inflation has stubbornly remained near 2%. That has caused the Federal Reserve to back away from the hawkish stance it took last summer towards raising rates. Lower interest rates means more money is spent on goods and services and less spent on servicing debt.

Also helping is low oil prices. Pricey energy is a net drag on the overall economy. Higher transportation, storage, and production costs get passed on to the consumer. Keeping those costs low encourages more consumer spending.

Finally, we have an incumbent in the White House as we head into the next election cycle. President Trump will do everything he can to keep the economy from going off the rails before November 2020.

Q: The U.S. is enjoying the lowest unemployment rate since Richard Nixon occupied the White House. Where do you see the jobless rate heading in 2019?

A: The economy is very close to full employment, so the unemployment rate isn’t likely to improve from where it is now.

The unemployment rate bottomed out at 3.7% in November, but rose to 4% by January. Most economists agree that an unemployment rate of 4% is optimal for the economy in terms of maximizing employment while leaving enough slack to prevent wages from going up too fast.

The windfall benefits of last year’s tax cut, enacted in December 2017, have run their course, so I expect big companies won’t be hiring as many people going forward as they have been recently. I believe the unemployment rate will rise to 4.5% during the second half of 2019.

Q: The stock market suffered a nasty decline in December 2018. Do you foresee further sharp sell-offs in the coming months? Which sectors seem especially vulnerable now?

A: I don’t expect another 20% correction, but I wouldn’t be surprised to see one or more quick dips in the 5%-10% range in 2019.

In particular, the real estate industry is vulnerable to rising interest rates. If the Fed resumes its hawkish stance towards containing inflation, I’d expect real estate investment trusts to take a pretty big hit.

The utility sector would also suffer if rates rise too fast. Higher bond yields would siphon money out of traditional equity income stocks such as utilities into investment-grade debt.

Despite the tech sector’s sell-off at the end of last year, I’m still leery of high-multiple tech stocks since most of them recovered so quickly over the past two months. As the economy slows, many of them will end up coming up short of analysts’ overly optimistic expectations for sales and profits.

Q: We’re witnessing a transition from momentum stocks to value. Which sectors currently present the best value?

A: The energy sector has sold off in response to falling oil prices, so now is a good time to increase exposure to high-quality oil producers. Many of them pay dividend yields that are higher than bond yields, and their share prices should appreciate when oil prices inevitably cycle higher.

Financial stocks are trading at very low multiples, so I’d expect to see many of them do well this year. The average forward price-to-earnings ratio (FPE) of the financial sector is 20% below its long-term average, while the average dividend yield is 10% higher than average. A simple reversion-to-the-mean could push many financial stocks up 10%-20% in 2019.

Q: What are the greatest risks confronting the stock market in 2019? How should investors hedge against these risks?

A: The single greatest known risks are rising inflation and economic weakness in Europe and Asia. For those reasons, I suggest the following three-pronged approach to managing portfolio risk:

1. Concentrate equities in low-multiple, high-dividend stocks primarily in the U.S.;
2. Exchange fixed-rate bonds for preferred stocks and convertible bonds; and
3. Hedge against rising inflation by owning commodity stocks.

Q: As inflation rises and geopolitical risk worsens, do you see favorable tailwinds for gold this year?

A: Yes, very much so. In fact, I recently predicted that the price of gold would rise above $1,500 an ounce by the end of 2019, which would be a 15% gain from where it started the year.

As you mention, all three of the major macroeconomic factors that cause gold to appreciate are in play this year: rising inflation, a cheaper dollar, and heightened geopolitical risks. For that reason, I recently added a gold mining company to the Personal Finance Growth Portfolio.

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

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