Stock prices were soaring earlier this year.

But worries about the economy are growing as deepening trade disputes start to spook investors. Where are markets heading from this point? Here are the latest ideas and advice on investing from Kiplinger’s Personal Finance magazine’s editors.

Investing

Continuing volatility is all but certain. Traders will be looking for any indications that ongoing trade altercations with China, Mexico and other countries are either easing or worsening.

Stocks may end the year little changed from their current level, though they’ll oscillate between short-lived rallies and sell-offs along the way.

Slowing earnings growth is a headwind for further market gains. After soaring in 2018 because of the tax cuts, corporate profits are rising at a far slower pace this year. Investors are unlikely to bid up share prices when profit growth is tepid.

On the upside, interest rates aren’t a worry the way they were at the start of the year. Back then, it looked as if the Federal Reserve would keep hiking. Now, the Fed is likely to dial back interest rates a bit.

Even in a sideways or down market, there are ways to make money. The key is to be selective, seeking stocks and sectors that can thrive as the economy slows.

Certain technology companies look attractive. Tech firms that import hardware from China or are facing antitrust scrutiny will be volatile. So, favor software makers and sellers of tech services. Two such stocks worth buying: Microsoft and Accenture, the high-tech consulting giant. Fidelity Select Software and IT Services Portfolio is a good option for mutual fund investors, as is Janus Henderson Global Technology.

Health care is another area to consider. Given America’s aging population, demand for medical devices and services is sure to grow in the long term. Three stocks that stand to gain from that trend: Becton, Dickinson. Medtronic. Boston Scientific. For funds, try Vanguard Health Care or Invesco S&P 500 Equal Weight Health.

Financial services companies are bargains. The Financial Select Sector SPDR is a diversified exchange-traded fund invested in banks, insurers and asset managers.

When investing in bonds, be careful. Yields on ultrasafe Treasuries are down, but they’re still worth owning, since their prices will rise when stocks inevitably sell off. There are some good buys among high-yield corporates, but also a lot of risky issues.

Dividend-paying stocks can provide some much-needed stability these days.

Be wary of small-cap stocks. They are most exposed to the tight job market, which is causing worker shortages and forcing employers to shell out more in wages.

Don’t overlook alternative investments such as real estate investment trusts. Two we like: American Tower, which yields 1.6%. And Realty Income, yielding 3.7%.

Jobs

Modest job growth in May is another reason to be cautious about the markets and the economy in general. Slower hiring is largely due to labor shortages. But there are also signs that some employers are becoming leery of expanding.

A slowdown in job creation points to weakening GDP growth after the surge in the first quarter. We continue to expect the economy to cool this year and into 2020.

Weaker jobs numbers give the Federal Reserve room to cut interest rates to buffer the damage from ongoing trade fights…a threat the Fed is watching closely.

U.S. Economy

Uncertainty over trade is driving inventories higher as many businesses stock up on imported goods or components ahead of potential tariffs. Inventories of automobiles are especially high…supplies equal to 70 days of sales, by one recent measure. Stocks of clothing and furniture are also getting excessive.

Rising inventories add to GDP in the short run. But the effect wears off if the backlogs keep rising and sales don’t grow enough to bring them back down. That’s another reason to expect growth to slow after starting the year so strong.

Global Economy

Until recently, Mexico looked like a winner in the U.S.-China trade war.

Suddenly that appears less assured. The levying of tariffs on Chinese imports by Washington had pushed many Chinese businesses to set up shop in Mexico instead. And reduced imports from China caused a surge in U.S.-Mexico trade. Earlier this year, Mexico briefly surpassed China to become America’s biggest two-way trade partner.

Mexico badly needs cross-border trade. 80% of its exports go to the U.S.

Its government has been eager to placate Washington after President Trump threatened to ratchet up tariffs on Mexican goods until flows of illegal immigrants are shut down…immigrants coming from Central America through Mexico into the U.S. The two sides were hopeful for a deal as we went to press, but not guaranteeing one.

The Mexican economy was already hurting. New tariffs would strain it badly.

One country that really is benefiting from the trade hostilities: Vietnam. The country has experienced a jump in trade and investment by foreign firms that are moving production facilities in order to get around escalating U.S. tariffs. Foreign investment in Vietnam…much of it Chinese…is up a whopping 69% this year. Vietnamese exports to the U.S. rose 40% in the first quarter of 2019. Closer trade ties have turned Hanoi into a key U.S. partner in the region, despite earlier hostilities.

But the boom may not last in the long term. Infrastructure limitations and rising land prices are challenges for companies doing business in Vietnam. Some are already turning to Malaysia as an alternative. Plus, there are indications that the White House could crack down on Vietnam’s big trade surplus with the U.S. The Treasury Dept. has already flagged Hanoi for possible currency manipulation.

Europe’s economy is going from bad to worse. European Union GDP growth is likely to come in at a scant 1% or so this year…even lower than originally expected. Manufacturing is contracting, Brexit remains in limbo, Italy’s finances are worsening, and France is beset by populist protests. Bright spots are conspicuously lacking.

Trade is a particular worry if Trump follows through on his earlier threats to impose tariffs on European cars and other goods. Germany is especially exposed in any potential trade fight with the U.S…it earns 50% of its GDP from exports.

Finance

The woes of the eurozone’s beleaguered banks continue as their profits slip. The first quarter saw bank profits in the countries that use the euro currency drop from a year earlier. European banks’ stock prices are off 25% from a year ago.

Earnings won’t revive until interest rates rise and allow banks to make more on their lending. But the European Central Bank won’t raise rates anytime soon.

Any turmoil in emerging markets would be bad news for Europe’s banks, which have heavy exposure to developing countries…Spanish banks in particular.

Article from The Kiplinger Letter June 7, 2019