So, how was your 2018? If it was anything like the VIX volatility index, it started with a grumble and is ending with a bang. Rewind to January 2018, the CBOE Volatility Index was asleep like a bear, with China behaving, Saudi keeping a lid on oil production and Donald Trump strutting into Davos like he owned the place. Then, the sleeping bear awoke with a startling jolt and has been grumpy ever since with NAFTA changes, China tariffs, Big Tech arrogance, Argentinian financial crises, Saudi atrocities, South African corruption, Brexit, schmexit and a whole lot of central bank anxiety.
The drastic ups and downs have even the most tenured analysts scratching their heads because the drawdown has persisted despite true, economic growth and accelerated corporate earnings. Then again, most of us know by now that the market is a reflection of our feelings, our concerns and fears of the unknown. The market hates uncertainty and surprises more than it hates bad news and 2018 has been riddled with 50 shades of gray uncertainties —inflation fears, a faster Fed hike and adjustment to central bank tightening, midterm elections and a U.S.-China trade war. The result? Wild volatility and muted returns. In fact, almost 90% of all global asset classes have generated negative returns this year (the highest proportion recorded in over a century).
Ok, so what if we just agree that volatility is the new norm? We sincerely believe we are still in a secular long-term bull market. Sure, growth and earnings are expected to moderate into 2019, but so are inflation, trade tensions and the Fed. In other words, we suspect things should calm down in the New Year and especially after this last week of tax loss harvesting (what’s tax loss selling? Read more here).
If excessive monetary tightening, escalating trade wars and a growth slump formed the basis for worry, then the investment outlook for 2019 is beginning to brighten based on the following:
- U.S. monetary authorities have signaled that they will slow their pace of tightening, while other major central banks push out the date for when they might start their respective tightening cycles;
- The Sino-U.S. trade war appears to be de-escalating, the USMCA (#newNAFTA) has been signed and the largest bilateral trade deal in history, between the EU and Japan, goes into effect March 2019;
- A global recession seems unlikely over the next year. Ongoing growth will be aided, in large part, by the world’s two largest economies - U.S. and China.
Remember that there is always going to be something to worry about and that when the world ends, it only ends once. Latest worries are: oil prices, the ongoing Mueller investigation and Trump administration drama, slowing global growth and trade tensions that could escalate instead of ease (oh, and last minute Christmas shopping).
But offsetting all this is one of the best macroeconomic backdrops in years for the US (the economy we’re concerned with most); several gauges of consumer and business confidence are at or near multi-decade highs or better, GDP is experiencing its best growth in four years, corporate earnings are having their best year in seven years, retail sales are growing at their fastest pace in seven years and unemployment is at a 49-year low. Will all of this be enough to overcome the tough finish to 2018? We think it will.
If you’re feeling anxious at all, please know that I am here for you and available to chat any time. Should you want something further to read, here are some good tidbits I’ve come across in the past few days:
Capital Group’s 5 keys to prevailing through Stock Market Declines – 5 tips to help you avoid common pitfalls and stay on track toward achieving your financial goals
BlackRock’s Global Investment Outlook 2019 – a collection of 100 investment professional’s thoughts and opinions on the global economic outlook, market themes, risks and asset views
Picton Mahoney’s Outlook – The Great Poker Game Continues and why alternatives are a necessary asset class
Dynamic’s Macro Musing – Investment thoughts and themes for 2019
Edgepoint’s article – show patience in a world of instant gratification
RBC’s Investment Outlook for 2019 – 6 quick and interesting reads contributing to the overall opinion that while it’s late in the game, the economic expansion should have stamina, and a constructive—yet vigilant—approach to financial markets is warranted
Many of you reading this are long-time clients, friends and family and so while I have the very special opportunity to do so, let me sincerely thank you for your continued loyalty and wish you and all those you love the happiest of holidays and all the very best for a happy, healthy and wealthy 2019.
Now you are in-the-know with Word on the Street.
Enjoy the weekend.