As we move into March, global stocks have enjoyed the best start to the year in almost three decades. Does this bode well for the rest of 2019? History suggests it does. Since 1928, a good January/February has led to a positive calendar year over 80 percent of the time. However, history does not always rhyme—especially in a post-2008 world. Our latest asset-allocation meeting was therefore a good opportunity to stand back and look at the bigger picture.
A Bruising Fourth Quarter
At the top of our agenda were the four “Ps”: politics, policy, profits and positioning. Financial market prices move because of the balance between supply and demand. A number of factors can influence this dynamic, including economic trends, technical issues and investor sentiment. Take December. After a tough November, a classic year-end rally was forming in the run-up to Christmas. And then the wheels fell off. Investors took fright at the prospect of more aggressive Federal Reserve (Fed) monetary policy. Trade tensions between the United States and China mounted. Many feared the manufacturing sector and global trade were headed for a mini recession. Concerns grew that this could broaden out to the wider economy. As a result, many institutional investors fled equities in favor of cash and other “safe-haven” assets.
No Longer Fed Up
But, as the New Year started, sentiment turned. Once again the Fed provided the mood music. Belatedly recognizing the economic dangers ahead, the Bank announced that it was putting interest rate rises on hold. Other central banks quickly followed. Indeed, the People’s Bank of China took steps to add liquidity to its economy. Meanwhile, the more stable U.S. dollar gave emerging market policymakers some room to maneuver. Politics also played a role, as hopes reignited of a U.S.-China trade deal.
Keep On Running?
Can this positive mindset continue? We think so. Admittedly, global economic growth remains subdued. However, economists have increased their 2020 forecasts, spurred by an improvement in emerging markets. More accommodative policy is already feeding into improved financial conditions. A significant slowdown in corporate profits has been priced-in and better prospects lie ahead. The risk of a near-term policy error in 2019—and consequent recession—has faded. Hence, asset prices have rallied strongly from their lows.
Where next on trade? U.S. President Trump is now in full re-election mode. After he failed to reach a nuclear agreement with North Korea, he will be keen for a quick win to boost his ratings. Many think this could come in the form of an agreement on trade with China. His recent decision to postpone tariffs on $200 billion of Chinese goods is a move in the right direction.
Further out, we don’t anticipate a global recession this year or next. While the effects of U.S. fiscal stimulus are starting to fade, Europe and China are pressing the fiscal accelerator. The Fed may well start raising rates again later this year, though it is likely to adopt a measured approach. Meanwhile, a range of temporary and structural factors should restrain underlying inflation in the major economies. True, wages are finally rising thanks to a tight labor market, but companies are offsetting this with cost cuts and efforts to boost productivity. This includes increased investment in digital technology.
Corrections Should Be Expected