We are smack bang in the middle of the “market outlook 2019” season. Despite the fact that economic and market fundamentals don’t really recognise the Gregorian calendar, economists, strategists, commentators et al, rush to give their views on what the next 12 months holds – usually conveniently forgetting what they may have said at the start if 2018!
2018 was a tough year – it was tough to make money. Global equities declined by about 12%.
This in itself yields the first article of faith put forward in this outlook season – equity markets are cheaper now.
Probably true – as long as prospective earnings don’t fall commensurately. But here’s the thing; in the short term it doesn’t really matter. Valuation does not drive markets in the short term. It is more of a hygiene function. The fact that equities may be cheaper now is a good thing but it is not a catalyst for major market moves. Markets, like stocks, can stay cheap or dear for an extended period.
For 2019, It may be more important to focus on those catalysts to try and chart a course through markets. And many, if not all, are the same as in 2018.
There is no shortage of potential catalysts – in fact It’s a laundry list.
Among the issues which could drive markets in 2019 are:
When will we see a US recession? Many feel that the indicators point to late 2019 or 2020. Current data is still robust but some forward looking indicators are softer, especially new orders. We shouldn’t talk ourselves into despair and a slowing economy isn’t necessarily a bad thing for stocks.
Will the US Federal Reserve pause on interest rate increases if the economy slows? They have more or less said they would. However this could be a mixed blessing. In Janet Yelland’s tenure at the US Central Bank, decisions not to hike rates sometimes unnerved markets even more.
China continues to loom large as a potential catalyst for markets. We have of course the soap opera of the trade talks where the tone and pace is driven as much by US domestic politics as global trade patterns. Recent numbers from Apple show how a less confident Chinese consumer directly impacts on US corporates.
There is also the overall health of the Chinese economy itself, and the question of whether Chinese policy makers will be as supportive in the event of weakness, as they were during the Global Financial Crisis. It does appear that they have less room for manoeuvrability given aggregate debt levels etc.
Closer to home, Europe could play a more material role for markets than it did in 2018. Brexit rumbles on. Macron’s position is clearly weaker. German politics is in transition. Italy remains unresolved. European elections in May could well see a further shift to populist policies. With economic growth subdued and the ECB shifting gear, there is ample opportunity for policy mistake.
I see these as key catalysts for market direction in 2019. And as they get resolved we can move into sunnier climes for investors. Equally they have the potential to upset.
So much of what may drive markets this year is less to do with economic fundamentals and more to do with politics and policies.
A recent Financial Times editorial was headlined
“Investors must rely on political common sense”
And that’s what’s scary!
Tradewinds 